Corporate Rivalry and Return Comovement
49 Pages Posted: 23 Jul 2018 Last revised: 2 Jun 2019
Date Written: May 31, 2019
We study changes in extra-factor, extra-industry return comovement among rival firms as they react to increased competition. Theory of industrial organization suggests that rivals will generally react in one of two ways: increase product differentiation from (become less similar to) close rivals, or reduce differentiation (become more similar) to take advantage of cost-saving scale economies. As changes in idiosyncratic return comovement reflect the resulting changes in underlying cash-flows correlations, our evidence is informative about these two mutually exclusive reaction functions. Notwithstanding substantial cross-industry heterogeneity, rivals typically become more - not less - similar.
Keywords: Return co-movement, competitive shocks, rival reactions, differentiation, M&As
JEL Classification: G34, G38, L10, L25
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