Real and Financial Industry Booms and Busts
42 Pages Posted: 21 Mar 2008 Last revised: 29 Apr 2009
Date Written: April 27, 2009
We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. Our results show how real and financial factors interact in industry business cycles. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock returns. Analyst estimates are positively biased and returns comove more in competitive industries. In concentrated industries these relations are weak and generally insignificant. Our results are consistent with firms and investors in competitive industries not fully internalizing the negative externality of industry competition on cash flows and stock returns.
Keywords: Product Markets, competition, stock, returns, booms, busts, analysts
JEL Classification: G3, G30, G31, G32
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