Intra-Industry Connectedness and the Corporate Information Environment

• In Event: SESSION 6D: Industries and Regulation

Abstract

In this paper I consider a measure of intra-industry connectedness that captures the connectedness of shocks to firms in the same industry and investigate its association with firms’ information environment. On the one hand, in industries where intra-industry connectedness is high, industry peers’ information is likely to be more relevant and more useful to investors. On the other hand, firms operating in such correlated environment are more likely to exhibit herding behavior, which could result in adverse effect on firms’ information environment. I provide evidence that firms in industries with high intra-industry connectedness have better earnings quality, less frequent management earnings forecasts, higher analyst following, more accurate and less dispersed analyst forecasts. In addition, firms operating in industries with high intra-industry connectedness have lower information asymmetry, as measured by the bid-ask spread, and lower cost of capital. Collectively, these findings suggest that industry peers’ information is an important information source that improves firms’ information environment in industries with high intra-industry connectedness; i.e., on average, potential herding in correlated environment does not adversely affect firms’ information environment.

Author

• Che-Wei Chiu, University of Texas-Dallas