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Product Market Competition and Industry Returns

Review of Financial Studies, Forthcoming

68 Pages Posted: 11 Nov 2012 Last revised: 2 Aug 2017

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Andres Donangelo

University of Texas at Austin - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 23, 2016

Abstract

This paper studies how expected returns interact with product market competition. The model predicts that (i) competition erodes markups, such that firms are more exposed to systematic risk; (ii) the threat of entry by new firms lowers exposure to systematic risk of incumbents; and (iii) higher industry aggregate risk represents a barrier to entry, such that riskier industries become less competitive. We provide empirical evidence consistent with these three channels and for an overall negative relation between returns and competition. We also consider a sample selection correction for publicly listed firms and use it to construct an alternative concentration measure.

Keywords: expected returns, product market competition, industry concentration, sample selection bias

JEL Classification: L11, L22, G11, G12, G31

Suggested Citation

Bustamante, Maria Cecilia and Donangelo, Andres, Product Market Competition and Industry Returns (December 23, 2016). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2173985 or http://dx.doi.org/10.2139/ssrn.2173985

Maria Bustamante

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://https://sites.google.com/a/rhsmith.umd.edu/mcbustam/?pli=1

Andres Donangelo (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/donangelo/

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