The impact of industry concentration on the market’s ability to anticipate future earnings: International evidence
International Journal of Accounting & Information Management
ISSN: 1834-7649
Article publication date: 3 October 2016
Abstract
Purpose
The existing literature has established the importance of industry concentration in explaining firm performance and information environments. However, little is known about whether and how industry concentration affects investors’ ability to anticipate future earnings. This paper aims to investigate this query by identifying and testing two channels, product market power and intra-industry information transfer, through which industry concentration affects the informativeness of stock returns about future earnings.
Design/methodology/approach
The paper measures the informativeness of stock returns about future earnings by the future earnings response coefficient (FERC)). This study estimates the FERC using a firm-level sample from 38 economies.
Findings
The authors find that industry concentration significantly enhances investors’ ability to predict future earnings. Further tests show that both product market power and intra-industry information transfer contribute to explaining the positive association between industry concentration and the FERC, with the former playing a more salient role. Finally, the authors show that a country’s effective competition law attenuates the positive impact of industry concentration on the FERC by weakening the economic impact of the two underlying channels.
Originality/value
This study contributes to the growing literature on the price-leading-earnings relation, industry concentration and international corporate governance.
Keywords
Acknowledgements
The authors would like to thank Kamran Ahmed (editor), an anonymous reviewer, Bok Baik, Jong-Hag Choi, Simon Fung (JCAE discussant), Lee-Seok Hwang, Woo-Jong Lee, Jong Chool Park (KAA discussant), Gord on Richardson, Heibatollah Sami (AAA discussant) and seminar participants at Seoul National University, the Annual Summer/International Conference of Korean Accounting Association, the Journal of Contemporary Accounting and Economics Symposium, and the American Accounting Association Annual Meeting for their comments and suggestions on the earlier versions of this paper.
Citation
Haw, I.-M., Hu, B., Lee, J.J. and Wu, W. (2016), "The impact of industry concentration on the market’s ability to anticipate future earnings: International evidence", International Journal of Accounting & Information Management, Vol. 24 No. 4, pp. 443-475. https://doi.org/10.1108/IJAIM-04-2016-0034
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited