The Impact of Industry Concentration on the Market's Ability to Anticipate Future Earnings: International Evidence

Abstract

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. Our study investigates this query by identifying and testing two channels, (1) product market power and (2) intra-industry information transfer, through which industry concentration affects the informativeness of stock returns about future earnings (proxied by the future earnings response coefficient [FERC]). Using a firm-level sample from 38 economies, we 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, we 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. Our study contributes to the growing literature on the price-leading-earnings relation, industry concentration, and international corporate governance.