Relative Firm Profitability and Stock Return Sensitivity to Industry-Level News

Posted: 20 Mar 2011

See all articles by Shengquan Hao

Shengquan Hao

Shanghai Jiao Tong University (SJTU)

Qinglu Jin

Shanghai University of Finance and Economics

Guochang Zhang

University of Hong Kong

Date Written: January 2011

Abstract

This study provides theory and evidence to demonstrate how relative firm profitability within an industry affects stock return sensitivity to industry-level news. Extending the Cournot and Bertrand competition models, we predict that (1) the returns of less profitable firms in an industry are more sensitive to industry-level news than those of more profitable firms, and that (2) this inverse relation between relative profitability and return sensitivity is more pronounced when there is positive rather than negative industry news, especially in industries with high (versus low) capital intensity. Using industry returns to proxy for industry-level news, we obtain empirical results consistent with these predictions. We further find that the two fundamental factors that contribute to profitability – cost efficiency and market share – each exhibit an effect similar to that of relative profitability in affecting return sensitivity. Our results remain unchanged after controlling for stock price movements attributable to common risk factors and firm-specific accounting information, and they hold over a range of robustness tests.

Keywords: relative profitability, industry-level news, return sensitivity, industry beta

JEL Classification: M41, G12

Suggested Citation

Hao, Shengquan and Jin, Qinglu and Zhang, Guochang, Relative Firm Profitability and Stock Return Sensitivity to Industry-Level News (January 2011). Accounting Review, Vol. 86, No. 4, 2011. Available at SSRN: https://ssrn.com/abstract=1788742

Shengquan Hao

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Qinglu Jin

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China
86-21-65908982 (Phone)

Guochang Zhang (Contact Author)

University of Hong Kong ( email )

KK Leung Building
Faculty of Business and Economics
Hong Kong
+852 3917 1076 (Phone)

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