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

Rev Account Stud (2014) 19:12251233 DOI 10.1007/s11142-014-9289-4

Rebecca N. Hann

Published online: 20 May 2014 Springer Science+Business Media New York 2014

Abstract Aobdia et al. (Rev Account Stud, 2014) view the economy as a network of customers and suppliers. Using the 1997 inputoutput trade ow data from the Bureau of Economic Analysis to model the inter-industry network, they examine whether an industrys position in the network, in particular, its network centrality, affects the transmission of information and economic shocks. They nd 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 ndings suggest that network centrality mattersit 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.

Keywords Industry network Network centrality Economic shocks

Aggregate uctuations Earnings predictability

JEL Classication E32 L16 M41

1 Introduction

Firms and industries do not exist in isolationthey are connected through various types of economic transactions, and together they form the economy. One important economic link arises from the interactions between customers and suppliers. What role do these interactions play in the macroeconomy? In particular, how do they

R. N. Hann (&)

Robert H. Smith School of Business, University of Maryland, College Park, MD, USA e-mail: [email protected]

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

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affect the transmission of economic shocks across the economy? The study by Aobdia et al. (2014), henceforth, ACO, is part of a growing literature that addresses this question by viewing the economy as a network of industries linked to each other through customer and supplier trades.1 Using the 1997 inputoutput (IO) trade ow data from the Bureau of Economic Analysis (BEA) to model the inter-industry network, ACO examine whether an industrys position in the network, in particular, its network centrality, affects the transmission of information and economic shocks.

Network centrality...