Industry Concentration and Average Stock Returns

Dice Center Working Paper No. 2003-30

43 Pages Posted: 23 Dec 2003

See all articles by Kewei Hou

Kewei Hou

Ohio State University (OSU) - Department of Finance

David T. Robinson

Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Date Written: February 15, 2005

Abstract

Firms in more concentrated industries earn lower returns, even after controlling for size, book-to-market, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent, in-sample, cash flow shocks do not explain this finding. Drawing on work in industrial organization, we posit that either barriers to entry in highly concentrated industries insulate firms from undiversifiable distress risk, or that firms in highly concentrated industries are less risky because they engage in less innovation, thus commanding lower expected returns. Additional tests support these risk-based interpretations.

JEL Classification: G12, L11, L25

Suggested Citation

Hou, Kewei and Robinson, David T., Industry Concentration and Average Stock Returns (February 15, 2005). Dice Center Working Paper No. 2003-30. Available at SSRN: https://ssrn.com/abstract=479726 or http://dx.doi.org/10.2139/ssrn.479726

Kewei Hou (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

David T. Robinson

Fuqua School of Business, Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-8023 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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