Industry-Wide Commonalities in Earnings

The article examines the effects of industry-wide commonalities on earnings in order to assess the significance of these commonalities and how they affect firms' earnings numbers. The article makes a distinction between economy-wide events such as government monetary policy that affect all firms in an economy, industry-wide events such as changes in consumer tastes that affect only the earnings in one industry, and firm-wide events, such as management changes that only affect one firm. The author suggests that industry commonalities are no less significant than economy-wide commonalities in explaining changes in firms' earnings numbers. These economic factors can even be reflected in security prices. The former studies were of interest to accounting researchers considering the distributional properties of accounting numbers, but the latest research may help estimate the value of industry information to investors studying the effect of these factors on firms' security prices.