Strategic Investment and Industry Risk Dynamics
Maria Cecilia Bustamante
London School of Economics & Political Science (LSE)
In this paper we characterize how firms' strategic interaction in product markets affects the industry dynamics of investment and expected returns. Under imperfect competition, a firm's exposure to systematic risk is jointly affected by its own investment strategy and the investment strategies of its industry peers, such that the dynamics of its expected returns depend on the intra-industry value spread. In the model and the data, firms' betas and returns correlate more positively in industries with low value spread, low dispersion in operating mark-ups, and low concentration.
Number of Pages in PDF File: 62
Keywords: expected returns, investment, imperfect competition, strategic interaction, industry concentration
JEL Classification: L11, L22, G11, G12, G31working papers series
Date posted: June 19, 2009 ; Last revised: April 10, 2013
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