The Limitations of Industry Concentration Measures Constructed with Compustat Data: Implications for Finance Research

48 Pages Posted: 24 Aug 2006 Last revised: 26 Jul 2014

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management

Sandy Klasa

University of Arizona - Department of Finance

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: February 1, 2008

Abstract

Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies of actual industry concentration. These measures have correlations of only 13 percent with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat based industry concentration measures may lead to incorrect conclusions.

Keywords: Industry concentration, product market competition, finance research

JEL Classification: G12, L10

Suggested Citation

Ali, Ashiq and Klasa, Sandy and Yeung, P. Eric, The Limitations of Industry Concentration Measures Constructed with Compustat Data: Implications for Finance Research (February 1, 2008). Available at SSRN: https://ssrn.com/abstract=926269 or http://dx.doi.org/10.2139/ssrn.926269

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Road, SM41
Richardson, TX 75080-3021
United States
972-883-6360 (Phone)
972-883-6811 (Fax)

HOME PAGE: http://www.utdallas.edu/~axa042200/

Sandy Klasa (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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