Product Market Threats: Implications for Future Profitability and its Use by Market Participants

52 Pages Posted: 21 Jan 2021

See all articles by Marcus Kirk

Marcus Kirk

University of Florida - Fisher School of Accounting

Jeffery Piao

University of Florida

Diana Weng

University of Florida - Warrington College of Business Administration

Date Written: November 11, 2020

Abstract

This study establishes the informational value of a firm’s product market competition, a measure derived from narrative disclosures in 10-K filings. Consistent with economic theory predicting faster mean reversion in earnings, we find that product market fluidity has large explanatory power for future profitability: higher fluidity (i.e., more competitive product market threats) is negatively associated with future earnings. However, capital market participants do not fully use this information leading to predictable future stock returns and sell-side analyst forecast errors. A trading strategy exploiting this information is associated with abnormal future returns and enhances other prominent size and book-to-market strategies. The findings are more consistent with mispricing than risk-based explanations: the results remain after adjusting for risk factors and cluster around subsequent earnings announcements. In addition, future analyst forecast errors and stock returns are directionally consistent with delayed information processing (mispricing). Overall, our findings suggest that qualitative disclosures can convey valuable information to capital market participants and play a meaningful role in fundamental analysis.

Keywords: voluntary disclosure, information content, capital markets, mispricing, fundamental analysis

JEL Classification: D53, M41, G11, G12, G14

Suggested Citation

Kirk, Marcus and Piao, Jeffery and Weng, Diana, Product Market Threats: Implications for Future Profitability and its Use by Market Participants (November 11, 2020). Available at SSRN: https://ssrn.com/abstract=3728729 or http://dx.doi.org/10.2139/ssrn.3728729

Marcus Kirk (Contact Author)

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-273-0222 (Phone)

Jeffery Piao

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Diana Weng

University of Florida - Warrington College of Business Administration ( email )

FL
United States

HOME PAGE: http://https://warrington.ufl.edu/phd-in-business-administration-accounting/phd-students/

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