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Shocks to Product Networks and Post-Earnings Announcement Drift

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Title: Shocks to Product Networks and Post-Earnings Announcement Drift
Authors: Baik, Bok
Hoberg, Gerard
Kim, Jungbae
Oh, Peter
Keywords: Product market Networks
Supply shocks
Post-earnings announcement drift
Issue Date: 31 Aug 2017
Abstract: This paper examines whether shocks to less visible product market peers are an important determinant of industry level post-earnings announcement drift (IPEAD) (Ayers and Freeman 1997; Hui et al. 2016). On the real-side, we find that a focal firm’s earnings are persistently related to the earnings surprises of its peers. On the financial-side, IPEAD arises only when these peers are less visible and when shocks are driven by persistent supply-side shocks to expenses, and not by demand-side shocks to sales. Text-based measures of disclosure opacity show that IPEAD is also stronger when firms provide less informative 10-K disclosures regarding their expenses. Collectively, our results suggest that inattention to less visible peers and a poor informational environment surrounding supply-side shocks are likely channels that generate IPEAD. IPEAD returns are economically large in subsamples motivated by this explanation.
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