Corporate Rivalry and Return Comovement

49 Pages Posted: 23 Jul 2018 Last revised: 2 Jun 2019

See all articles by Eric de Bodt

Eric de Bodt

Univ. Lille

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Richard Roll

California Institute of Technology

Date Written: May 31, 2019

Abstract

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

Suggested Citation

de Bodt, Eric and Eckbo, B. Espen and Roll, Richard W., Corporate Rivalry and Return Comovement (May 31, 2019). Tuck School of Business Working Paper No. 3218544. Available at SSRN: https://ssrn.com/abstract=3218544 or http://dx.doi.org/10.2139/ssrn.3218544

Eric De Bodt

Univ. Lille ( email )

1 place Déliot, BP381
59020 Lille Cedex
France
+03 20 90 74 77 (Phone)
+03 20 90 77 02 (Fax)

HOME PAGE: http://www.edebodt.net

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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