Competition Network and Predictable Industry Returns

Joint with Wei Wu

August 2023

We document robust industry return predictability through the lens of a competition network, connecting two industries that share a multi-industry market leader. Equity returns in an industry exhibit a delayed response to cross-industry effects due to investors' limited attention and constrained information-processing capabilities. Focal industries have higher contemporaneous and future returns when connected peer industries, through the competition network, exhibit higher stock returns. This information incorporation process happens faster with more analyst coverage and higher institutional ownership of the focal industries. Additionally, higher future returns in focal industries often follow an increase in peers' profit margins, supporting our economic mechanisms.