Information Diffusion of Upstream and Downstream Industry-Wide Earnings Surprises and Its Implications

44 Pages Posted: 14 Mar 2012 Last revised: 16 Nov 2017

See all articles by Hsiu-Lang Chen

Hsiu-Lang Chen

University of Illinois at Chicago - Department of Finance

Date Written: May 24, 2017

Abstract

This study presents new evidence that industry-wide earnings surprises indeed diffuse gradually across the supply chain at both industry and individual-firm levels. This evidence provides fundamental support for studies in the literature of gradual information diffusion, commonly using lagged returns as a proxy for information. To allow for the possibility that firms react differently to the industry-wide earnings surprises, this study measures how a stock’s returns respond to the part of its main customer or supplier industry’s lagged returns that are associated with earnings surprises. A long/short equity strategy by combining the firm’s response coefficient and the prior month’s main customer/supplier industry return is shown to be profitable. The strategy tends to select medium-sized firms across industries. Less-constrained firms are more likely to be in the winner portfolio and are better able to cope with industry shocks by riding on positive shocks and shielding themselves from negative ones.

Keywords: Industry-wide Earnings Surprises, Information Diffusion, Supply Chain

JEL Classification: G10, G12, G14

Suggested Citation

Chen, Hsiulang, Information Diffusion of Upstream and Downstream Industry-Wide Earnings Surprises and Its Implications (May 24, 2017). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2020850 or http://dx.doi.org/10.2139/ssrn.2020850

Hsiulang Chen (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 355-1024 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
22
Abstract Views
171
PlumX Metrics