[Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies for actual industry concentration. These measures have correlations of only 13% with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that moreconcentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustatbased industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat-based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat-based industry concentration measures may lead to incorrect conclusions.]

Bayesian theory predicts an increase in market participants' reliance on reported current earnings to revise their expectations of future earnings when the uncertainty in future earnings is higher. Prior studies focus on price reactions and find negative associations between measures of earnings uncertainty and investors' reliance on reported current earnings. This study examines analysts' forecast revisions (of future earnings) around the announcements of current period earnings and finds positive associations between measures of earnings uncertainty and analysts' reliance on reported current earnings. The findings suggest that uncertainty measures and discount rates are correlated, and cross-sectional differences in the discount rate taint the interpretation of price reactions as evidence of expectation revisions under uncertainty. This study sheds additional light on the complex relationships among earnings uncertainty measures, price reactions to earnings surprise, and cost of capital.

We examine the impact of institutional ownership on financial reporting discretion, focusing on whether the impact varies with institutions' cost of acquiring monitoring information. Using geographic distance between the firm and the institutional investor as a proxy for the cost of acquiring monitoring information, we find that corporate managers are less likely to use financial reporting discretion in the presence of local monitoring institutions than distant monitoring institutions. We also find that the impact of monitoring institutions on financial reporting discretion varies with the costs and benefits of financial reporting discretion.

This study examines the association between U.S. Census industry concentration measures and the informativeness of corporate disclosure policy. We find that in more concentrated industries firms׳ management earnings forecasts are less frequent and have shorter horizons, their disclosure ratings by analysts are lower, and they have more opaque information environments, as measured by the properties of analysts׳ earnings forecasts. Also, when these firms raise funds they prefer private placements, which have minimal SEC-mandated disclosure requirements, over seasoned equity offerings. Overall, our findings suggest that firms in more concentrated industries disclose less and avoid certain financing decisions that have non-trivial disclosure implications, presumably due to proprietary costs of disclosure.

We test whether the post‐forecast revision drift is mainly attributable to investors’ underreaction to industry‐wide earnings news conveyed by analysts’ forecast revisions. We find a large drift associated with industry‐wide earnings news but no drift associated with firm‐specific earnings news. Consistent with the functional fixation hypothesis, we provide evidence that the post‐forecast revision drift is driven by investors’ underreaction to the higher persistence of industry‐wide earnings. Although prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion, we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals.

Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies for actual industry concentration. These measures have correlations of only 13% with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more-concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat-based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat-based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat-based industry concentration measures may lead to incorrect conclusions. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

Managers frequently attribute the news in their earnings forecasts to various economic events. Using textual analysis, we identify the economic factors underlying earnings news from press releases. We document a wide range of industry‐wide shocks and firm‐specific actions to which the earnings news in management forecasts is attributed. As expected, earnings attributions significantly affect peer firms’ price reactions to the earnings news. Specifically, earnings news attributed to industry‐wide trends or firm structural changes leads to positive information transfers but earnings news attributed to firm competitive moves triggers negative information transfers. Information transfers are much stronger when each economic factor is mentioned the first time in a given industry‐year. Further analysis reveals that the strength of information transfers varies with firm‐level rivalry within the industry (i.e., similar business strategies, market position, and level of competition).

Blockholding multiple firms within an industry generates an information advantage for institutional investors, who can better differentiate between the industry-wide and firm-specific nature of bad news released by peer firms and avoid selling on false spillover signals (i.e., “smart exit”). Empirically, we document that industry common ownership reduces future firm-level stock price crash risk. Our results can be explained by the attenuated spillover from industry peers' firm-specific bad news, as a complement to the monitoring effect that reduces the focal firm's hoarding of bad news. Our results suggest that the presence of industry common owners provides a stabilizing effect against stock price contagion.

This study examines firm performance surrounding insiders' prepaid variable forward (PVF) transactions to infer insiders' information when they enter these off‐market contracts. PVFs allow insiders to hedge downside risk, share performance gains, and obtain immediate large‐sum cash payments for investment or consumption. On average, PVF transactions cover 30% of a sample insider's firm‐specific wealth ($22 million), which is substantially larger than a typical open‐market sale. PVFs systematically follow strong firm performance and precede degraded stock and earnings performance. PVFs also precede periods of negative abnormal returns relative to potential alternative investments. The documented association between PVFs and performance declines does not appear to result from the market's response to transaction disclosure, participant self‐selection, or general price reversals. Thus, evidence suggests that insiders use PVFs to diversify firm‐specific holdings in anticipation of performance declines.