Do investors anticipate the future earnings of firms in a homogeneous industry?

Abstract

This paper investigates whether industry homogeneity improves earnings informativeness about future earnings. Because homogeneity, defined as a similarity in accounting practices in generating earnings of firms in the same industry, facilitates information transfer and comparability among peer firms, we conjecture that homogeneity influences investors' abilities to forecast future earnings. Using Korean data, we found that homogeneity has incremental effects on the future earnings response coefficient (FERC). After including control variables and utilizing re-measured homogeneity, the results remain unchanged. Our findings imply that the homogeneity of accounting practices within an industry benefits market participants.