Leaders, Followers, and Risk Dynamics in Industry Equilibrium

47 Pages Posted: 6 Mar 2008 Last revised: 6 May 2013

See all articles by Murray Carlson

Murray Carlson

University of British Columbia (UBC) - Sauder School of Business

Engelbert J. Dockner

WU Vienna University of Economics and Business (deceased)

Adlai J. Fisher

University of British Columbia (UBC) - Sauder School of Business

Ron Giammarino

University of British Columbia (UBC) - Sauder School of Business

Date Written: October 19, 2012

Abstract

We study the distinct impacts of own and rival actions on risk and return when firms strategically compete in the product market. Contrary to simple intuition, a competitor’s options to adjust capacity reduce own-firm risk. For example, if a rival possesses a growth option, an increase in industry demand directly enhances profits but also encourages value-reducing competitor expansion. The rival option thus acts as a natural hedge. Within the industry, we obtain endogenous differences in expected returns. In a leader-follower equilibrium, own-firm and competitor risks and required returns move together through contractions and oppositely during expansions, providing testable new predictions.

Keywords: Real options, dynamics of firm and industry risk, asset pricing, corporate investment, valuation, cost-of-capital

JEL Classification: G31, G12, D43

Suggested Citation

Carlson, Murray D. and Dockner, Engelbert J. and Fisher, Adlai J. and Giammarino, Ronald, Leaders, Followers, and Risk Dynamics in Industry Equilibrium (October 19, 2012). AFA 2007 Chicago Meetings Paper; EFA 2009 Bergen Meetings Paper; Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=891689 or http://dx.doi.org/10.2139/ssrn.891689

Murray D. Carlson

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8358 (Phone)

Engelbert J. Dockner (Contact Author)

WU Vienna University of Economics and Business (deceased)

Heiligenstaedter Strasse 46-48
Vienna, 1190
Austria
+431313366302 (Phone)
+43131336906302 (Fax)

HOME PAGE: http://www.wu.ac.at/finance/people/faculty/list/dockner

Adlai J. Fisher

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8331 (Phone)
604-822-4695 (Fax)

HOME PAGE: http://finance.sauder.ubc.ca/~fisher

Ronald Giammarino

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver BC V6T 1Z2
Canada
604-822-8357 (Phone)
604-822-4695 (Fax)

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