Market Power and Systematic Risk

Abstract

We examine the impact of product market competition on firms' systematic risk. Using a measure of total product market similarity, we document a strong negative relationship between market power and market betas. The effect more than triples in the most recent period of low competition. Anti-competitive mergers result in a significant reduction in market betas. Firms facing less competition seem to be partially insulated from systematic discount rate shocks. Lower equity costs therefore imply that market power is partly self-perpetuating.

Keywords: Market power, systematic risk, market beta, mergers and acquisitions, product market competition, discount-rate beta

JEL Classification: G10, L11, G34, L25, L22