Dynamic Collusion, Vertical Competition, and Systematic Risk
52 Pages Posted: 3 Dec 2020
Date Written: October 30, 2020
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: Suggested Citation