Industry Networks and the Speed of Information Flow

We investigate whether an industry's position in the network of inter-industry trade affects the speed of information flow. We find that return predictability to central industries from their related (=customer and supplier) industries is substantially stronger than that to peripheral industries from their related industries. Long-short portfolios of central industries yield risk-adjusted returns of 7.0% to 7.9% per annum, which are 3.6% to 5.3% higher than those of peripheral industries. To explain this finding, we argue that investors who invest in central industries need to process more complicated information about related industries, making the prices of central industries slower to incorporate all the information. We find that sell-side analysts of central industries also face more complicated information about related industries, as their earnings forecast revisions of related industries predict their future revisions of central industries more strongly. In addition, we present evidence that our finding is not explained by existing anomalies.