Industry Concentration, Excess Returns and Innovation in Australia

Accounting and Finance, Forthcoming

31 Pages Posted: 6 Oct 2012 Last revised: 22 Apr 2014

See all articles by David R. Gallagher

David R. Gallagher

Capital Markets CRC Limited

Katja Ignatieva

University of New South Wales - Australian School of Business

James McCulloch

University of Technology, Sydney; Macquarie University

Multiple version iconThere are 2 versions of this paper

Date Written: February 2, 2014

Abstract

This paper examines market concentration and stock returns on the Australian Securities Exchange. We find that dominant companies operating in concentrated industries in Australia are able to generate significant risk-adjusted excess stock returns. Our results for Australian data are opposite to that found by Hou and Robinson (2006) for United States market data. Hou and Robinson reason that U.S. firms which operate in concentrated industries are insulated from competitive pressures, have lower levels of innovation (Arrow (1962)) and therefore experience lower profitability and stock returns. By contrast, the Australian data shows a signif- icant and positive relationship between concentration and innovation expenditure. Therefore, the excess stock returns of dominant companies in Australia is consistent with previous research linking innovation expenditure with excess stock returns. We hypothesize that the apparent contradiction of our results compared with Hou and Robinson (2006) for the United States market is resolved by an examination of the differences in size and competition in U.S. and Australian industries and the con- sequent differential ability of dominant companies in the two countries to generate monopoly rents and invest in ‘Schumpeterian’ (Schumpeter (1942)) innovation.

Keywords: Industry concentration, competition, stock return

JEL Classification: G12

Suggested Citation

Gallagher, David R. and Ignatieva, Katja and McCulloch, James, Industry Concentration, Excess Returns and Innovation in Australia (February 2, 2014). Accounting and Finance, Forthcoming . Available at SSRN: https://ssrn.com/abstract=2157466 or http://dx.doi.org/10.2139/ssrn.2157466

David R. Gallagher

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

Katja Ignatieva (Contact Author)

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

James McCulloch

University of Technology, Sydney ( email )

15 Broadway, Ultimo
Sydney 2007, New South Wales
Australia

Macquarie University

North Ryde
Sydney, New South Wales 2109
Australia

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