Intra-Life Cycle Information Transfers

Abstract

We investigate the presence of a shared life cycle component in earnings and test whether the earnings of one firm are relevant for valuing other firms in the same life cycle stage. We find that firm-pairs in the same life cycle stage have greater accounting comparability and greater co-movement in their returns, operating performance, and investments than firm-pairs consisting of firms in different life cycle stages. We further document economically significant transfers of information from announcing firms to non-announcing life cycle peers around an announcing firm’s earnings announcement. The magnitudes are comparable to that of intra-industry information transfers and do not depend on whether the life cycle peers are also active in the same industry. In contrast, we find that intra-industry information transfers are smaller for industry peers in different life cycle stages. Information transfers are stronger for life cycle peers that have greater (transient) institutional cross-holdings, suggesting that institutional trading is an important mechanism by which life cycle information spills over. Overall, this study provides insight into the factors that shape a firm’s earnings generation process and investors’ use of such factors. Furthermore, this study complements prior literature on firm life cycle by providing additional evidence on the importance of life cycle in the valuation process.