Intra-industry information transfer effects of leading firms’ earnings narratives

Abstract

We investigate whether there are information transfers related to the narratives accompanying earnings announcements in the same way there are for bottom-line earnings numbers. Our study is motivated by the conjecture that the narratives accompanying earnings press releases may contain industry-relevant information beyond that conveyed by the earnings number. If so, we expect earnings narratives to trigger distinct information transfer to industry-related peers. Our empirical tests confirm that, after controlling for the earnings information transfer, when industry leaders report positive earnings news and cite external causes, industry peers experience share price increases. Conversely, when industry leaders experience earnings disappointments and cite external causes, industry peers experience share price declines. We also find that the level of industry concentration plays a significant role in these relationships. These findings add to our understanding of the dynamics underlying co-movement of share prices within an industry. Additionally, these findings provide insights into another (previously undiscovered) means by which earnings narratives have relevance for investors.