Dynamic Collusion, Vertical Competition, and Systematic Risk

52 Pages Posted: 3 Dec 2020

See all articles by Guoman She

Guoman She

The University of Hong Kong - Faculty of Business and Economics

K.C. John Wei

Hong Kong Polytechnic University

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: October 30, 2020

Abstract

Building on dynamic collusion theories, we predict that firms with less concentrated upstream or downstream industries have lower systematic risk because their supply chain partners tend to compete more aggressively during recessions, absorbing more of the adverse effect of aggregate shocks. Consistent with this prediction, we find that these firms experience a smaller decrease in fundamental performance during recessions, have significantly lower fundamental and capital market risks, and enjoy a significantly lower cost of equity capital. The overall results highlight the importance of vertical competition in determining a firm’s systematic risk and cost of equity capital.

Keywords: Dynamic Collusion; Vertical Competition; Systematic Risk; Cost of Equity Capital

JEL Classification: L11, L22, G11, G12

Suggested Citation

She, Guoman and Wei, Kuo-Chiang (John) and You, Haifeng, Dynamic Collusion, Vertical Competition, and Systematic Risk (October 30, 2020). Available at SSRN: https://ssrn.com/abstract=3727929 or http://dx.doi.org/10.2139/ssrn.3727929

Guoman She

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Haifeng You (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

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