Product Market Competition and Overreaction to Intra-Industry Information Transfers

This study investigates the effect of product market competition on the overreaction to intra-industry information transfers. There is evidence in the extant literature that the stock market overreacts to the information transfers resulting from the earnings announcements of early peers. Recent studies have examined why investors overreact to information transfers. This study predicts that the overreactions to intra-industry information transfers are stronger (weaker) in the face of high (low) product market competition. Focusing on the Japanese stock market, this study reports that the overreaction to the first announcer’s earnings announcements is observed only when firms face higher product market competition, which is consistent with the prediction. This result implies that product market competition is the significant determinant of the accounting anomaly related to intra-industry information transfers.