Industry Concentration and Average Stock Returns
Dice Center Working Paper No. 2003-30
43 Pages Posted: 23 Dec 2003
Date Written: February 15, 2005
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: Suggested Citation