A discussion of “Inter-industry network structure and the cross-predictability of earnings and stock returns”

Abstract

Aobdia et al. (Rev Account Stud, 2014) view the economy as a network of customers and suppliers. Using the 1997 input–output trade flow data from the Bureau of Economic Analysis to model the inter-industry network, they examine whether an industry’s position in the network, in particular, its “network centrality,” affects the transmission of information and economic shocks. They find that, compared to the accounting performance and stock returns of noncentral industries, those of central industries are explained by aggregate risks to a greater extent and are more highly associated with the contemporaneous and future performance of their linked industries. These findings suggest that network centrality matters—it plays an important role in how economic shocks are transmitted within the economy. The question of why network centrality matters, however, remains unanswered. A fruitful avenue for future research is to explore the origin of shocks to shed light on the fundamental question of whether sectoral shocks can aggregate into macro shocks.