nach oben

Review of Quantitative Finance and Accounting

Erschienen in:

01.10.2011 | Original Research

Stock returns and product market competition: beyond industry concentration

verfasst von: Vivek Sharma

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 3/2011

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

The main purpose of this paper is to provide direct evidence that product market structure affects stock returns. This is not only through industry concentration, as found in Hou and Robinson (J Finance 61:1927–1956, 2006), but also based on firms’ product substitutability and industry market size. Furthermore, the predictive power of product substitutability and market size for stock returns is not subsumed by industry concentration. Our results highlight the multi-dimensional structure of product market competition and its impact on asset prices.

Vorheriger Artikel The profitability of interest arbitrage when the base currency is pegged to a basket

Nächster Artikel Momentum trading, mean reversal and overreaction in Chinese stock market

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

A notable exception is Melicher et al. (1976), who examined the relationship between concentration and stock returns for 495 firms for the period 1967–1974, and documented only “average” returns for the shareholders of high concentration ratio firms.

However, some studies are skeptical that market structure affects a firm’s R&D expenditure. For example, Cohen and Levin (1989), using panel data models along with controls for technology, document that the supposed relationship between market concentration and the amount a company invests in research and development disappears.

One could argue that stock returns are related to the direct measures of barriers to entry, since those firms in industries with high barriers to entry will face lesser distress risk, thereby lowering expected returns. However, Hou and Robinson (2006) argue that the direct measures of barriers to entry are either unattractive or, at best, incomplete, since barriers to entry reflect the strategic choices of incumbents firms as well as the primitive levels of industry production technology.

Although the firms in higher concentration ratios have larger sales, it need not necessarily imply that industries associated with these firms also have larger sales on average. For this to happen there should also be more number of firms in the higher concentration ratio industries. In fact we found a negative correlation between Herfindhal–Hirschman index and the number of firms. This is consistent with the notion that we observe less competition in the higher concentration ratio industries partly because of fewer numbers of firms being present in them.

In contrast to Table 2, Panel A that shows that a typical firm in high concentration ratio has higher sales, Table 1, Panel B relates the industry sales of all firms in aggregate to concentration ratio. Thus Table 2, Panel A and Table 1, Panel B are not inconsistent with each other.

We also used the 1- and 2-year average returns from the CRSP value-weighted index in order to classify the market states; we found similar results as those reported here.

Aghion P, Bloom N, Blundell R, Griffith R, Howitt P (2001). Empirical estimates of the relationship between product market competition and innovation. Mimeo

Aguerrevere F (2009) Real options, product market competition and asset returns. J Finance 64:957–983CrossRef

Ali A, Klasa S, Yeung E (2009) The limitations of industry concentration measures constructed with compustat data: implications for finance research. Rev Finan Stud 22:3839–3871CrossRef

Bain J (1956) Barriers to new competition. Harvard University Press, Cambridge, MA

Bernier G (1987) Market power and systematic risk: an empirical analysis using Tobin’s Q ratio. J Econ Bus 39:91–99CrossRef

Besanko D, Dranove R, Shanley M (2000) Economics of strategy. Wiley, New York

Booth L (1981) Market structure uncertainty and the cost of capital. J Bank Finance 5:467–482CrossRef

Carlton D, Perloff J (1994) Modern industrial organization. Harper Collins College Publishers, New York

Chan K, Lakonishok J, Sougiannis T (2001) The stock market valuation of research and development expenditures. J Finance 56:2431–2456CrossRef

Chen K, Cheng D, Hite G (1986) Systematic risk and market power: an application of Tobin’s Q. Q J Econ Bus Autumn 26:58–72

Cohen W, Levin R (1989) Innovation and market structure. In: Schmalensee R, Willing R (eds) Handbook of industrial organization. Elsevier, Amsterdam

Collins N, Preston L (1969) Price-cost margins and industry structure. Rev Econ Stat 51:271–286CrossRef

Cooper M, Gutierrez R Jr, Hameed A (2004) Market states and momentum. J Finance 59:1345–1365CrossRef

Cooper M, Gulen H, Schill M (2008) Asset growth and the cross-section of stock returns. J Finance 63:1609–1652CrossRef

Curley A, Hexter J, Choi D (1982) The cost of capital and the market power of firms: a comment. Rev Econ Stat 64:519–523CrossRef

Demsetz H (1973) Industry structure, market rivalry and public policy. J Law Econ 16:1–10CrossRef

Demsetz H (1997) The economics of the firm: seven critical commentaries. Cambridge University Press, Cambridge

Fama E, French K (1992) The cross-section of expected stock returns. J Finance 47:427–465CrossRef

Fama E, MacBeth J (1973) Risk, return and equilibrium: empirical tests. J Polit Econ 81:607–636CrossRef

Gaspar J, Massa M (2006) Idiosyncratic volatility and product market competition. J Bus 79:3125–3152CrossRef

Hoberg G, Phillips G (2010) Real and financial industry booms and busts. J Finance 65:45–86

Hou K, Robinson DT (2006) Industry concentration and average stock returns. J Finance 61:1927–1956CrossRef

Karuna C (2007) Industry product market competition and managerial incentives. J Account Econ 43:275–297CrossRef

Kothari S, Laguerre T, Leone A (2002) Capitalization versus expensing: evidence on the uncertainty of future earnings from capital expenditures versus R&D outlays. Rev Acc Stud 7:355–382CrossRef

Lee C, Liaw K, Rahman S (1990) Impacts of market power and capital-labor ratio on systematic risk: a Cobb-Douglas approach. J Econ Bus 42:237–241CrossRef

Lerner A (1934) The concept of monopoly and the measurement of monopoly power. Rev Econ Stud 3:157–175

Lev B, Sougiannis T (1996) The capitalization, amortization and value-relevance of R&D. J Account Econ 21:107–138CrossRef

Mann M (1966) Seller concentration, barriers to entry and rates of return in thirty industries. Rev Econ Stat 48:296–307CrossRef

Mas-Colell A, Whinston M, Green J (1995) Microeconomic theory. Oxford University Press, New York

Melicher R, Rush D, Winn D (1976) Degree of industry concentration and market risk-return performance. J Finan Q Anal 11:627–635CrossRef

Moyer RC, Chatfield R (1983) Market power and systematic risk. J Econ Bus 35:123–130CrossRef

Nevo A (2001) Measuring market power in the ready-to-eat cereal industry. Econometrica 69:307–342CrossRef

Pastor L, Veronesi P (2009) Technological revolutions and stock prices. Am Econ Rev 99:1451–1483CrossRef

Penman S, Zhang X (2002) Accounting conservatism, the quality of earnings and stock returns. Account Rev 77:237–264CrossRef

Peress J (2010) Product market competition, insider trading and stock market efficiency. J Finance 65:1–43CrossRef

Peyser P (1999) Firm-theoretic limitations on proposition III. Rev Quant Financ Acc 12:65–88CrossRef

Qualls D (1972) Concentration barriers to entry and long-run economic profit margins. J Indus Econ 20:146–158CrossRef

Raith M (2003) Competition, risk, and managerial incentives. Am Econ Rev 93:1425–1436CrossRef

Rhoades S (1979) Concentration, barriers and rates of return: a note. J Indus Econ 19:82–88CrossRef

Schumpeter J (1912) The theory of economic development. Harvard University Press, Cambridge, Mass

Subrahmanyam M, Thomadakis S (1980) Systematic risk and the theory of the firm. Quart J Econ 94:437–451CrossRef

Sullivan T (1978) The cost of capital and the market power of firms. Rev Econ Stat 60:209–217CrossRef

Sullivan T (1982) The cost of capital and the market power of firms: reply and correction. Rev Econ Stat 64:525–532CrossRef

Sutton J (1991) Sunk costs and market structure. MIT Press, Cambridge

Symeonidis G (2002) The effects of competition: Cartel policy and the evolution of strategy and structure in British industry. The MIT Press, Cambridge

Thomadakis S (1976) A model of market power, valuation and the firm’s return. Bell J Econ Manage Sci 7:150–162

Tu A, Chen S (2000) Bank market structure and performance in Taiwan before and after the 1991 liberalization. Rev Pac Basin Finan Mark Policies 3:475–490

Van H (1982) Corporate monopoly power and risk. Eur Econ Rev 18:115–124

Wallace M, Watson S, Yandle B (1988) Environmental regulation: a financial markets test. Q Rev Econ Bus (Spring):69–87

Weisss L (1974) The concentration-profit relationship and antitrust. In: Goldschmid HJ et al (eds) Industrial concentration: the new learning. Little, Brown, Boston, pp 201–220

Titel: Stock returns and product market competition: beyond industry concentration
verfasst von: Vivek Sharma
Publikationsdatum: 01.10.2011
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 3/2011
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-010-0205-0

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 3/2011

Performance persistence of closed-end funds

Momentum trading, mean reversal and overreaction in Chinese stock market

An application of the two-stage Bivariate Probit–Tobit model to corporate financing decisions

The profitability of interest arbitrage when the base currency is pegged to a basket

The IPO market as a screening device and the going public decision: evidence from acquisitions of privately and publicly held firms