Product Market Competition and Equity Returns

42 Pages Posted: 12 Mar 2012

See all articles by Evgeny Lyandres

Evgeny Lyandres

Tel Aviv University

Masahiro Watanabe

University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

Date Written: August 30, 2012

Abstract

We develop an analytically tractable equilibrium model to examine the link between competition in product markets and stock returns. Firms maximize pro…fits from the sale of their products to consumers. Investors receive …firm profi…ts as investment returns. We characterize fi…rms' ’optimal production plans and expected equity returns, and show that …firm heterogeneity within an industry leads to differences in expected returns across …firms. In particular, we demonstrate that the expected returns of …firms with reliable products can decrease with competition. This is a distinguishing feature of our model with endogenous production which standard models of exogenous production will not deliver. We show empirically that the compensation for bearing cash flow risk resulting from competition in output markets is economically significant and that product market competition is associated with average returns in ways that are consistent with the model.

Suggested Citation

Lyandres, Evgeny and Watanabe, Masahiro, Product Market Competition and Equity Returns (August 30, 2012). Available at SSRN: https://ssrn.com/abstract=2017225 or http://dx.doi.org/10.2139/ssrn.2017225

Evgeny Lyandres (Contact Author)

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel
6400241 (Fax)

Masahiro Watanabe

University of Alberta - School of Business ( email )

School of Business - FMS
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-7343 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.ualberta.ca/~masa/

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

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