Impact of Product Market Competition on Expected Returns

Datum

2011-12

Zeitschriftentitel

ISSN der Zeitschrift

Bandtitel

Verlag

University of Oregon

Zusammenfassung

This paper examines how competition faced by firms affects asset risk and expected returns. Contrary to Hou and Robinson's (2006) findings, I find that cross-industry variation in competition, as measured by the concentration ratio, is not a robust determinant of unconditional expected stock returns. In contrast, within-industry competition, as measured by relative price markup, is positively related to expected stock returns. Moreover, this relation is not captured by commonly used models of expected returns. When using the Markov regime-switching model advocated by Perez-Quiros and Timmermann (2000), I test and find support for Aguerrevere's (2009) recent model of competition find risk dynamics. In particular, systematic risk is greater in more competitive industries during bad times and greater in more concentrated industries during good times. In addition, real investment by firms facing greater competition leads real investment by firms facing less competition, supporting Aguerrevere's notion that less competition results in higher growth options and hence higher risk in good times.

Beschreibung

x, 94 p. : ill. (some col.)

Schlagwörter

Finance, Social sciences, Expected returns, Conditional model, Empirical asset pricing, Market competition, Market power

Zitierform