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Real and Financial Industry Booms and Busts

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  • Gerard Hoberg
  • Gordon M. Phillips

Abstract

We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock returns. We also find that analyst estimates are positively biased and returns comove more when industry valuations are high in competitive industries. In concentrated industries these relations are weak and generally insignificant. Our results suggest that when industry stock-market valuations are high, firms and investors in competitive industries do not fully internalize the negative externality of industry competition on cash flows and stock returns.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14290.

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Date of creation: Aug 2008
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Publication status: published as Gerard Hoberg & Gordon Phillips, 2010. "Real and Financial Industry Booms and Busts," Journal of Finance, American Finance Association, vol. 65(1), pages 45-86, 02.
Handle: RePEc:nbr:nberwo:14290

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Citations

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Cited by:
  1. Robin Greenwood & Samuel Hanson, 2013. "Waves in Ship Prices and Investment," NBER Working Papers 19246, National Bureau of Economic Research, Inc.
  2. Datta, Sudip & Iskandar-Datta, Mai & Singh, Vivek, 2013. "Product market power, industry structure, and corporate earnings management," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(8), pages 3273-3285.
  3. Chang, Eric C. & Luo, Yan & Ren, Jinjuan, 2013. "Pricing deviation, misvaluation comovement, and macroeconomic conditions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 5285-5299.
  4. Gerard Hoberg & Gordon M. Phillips, 2008. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," NBER Working Papers 14289, National Bureau of Economic Research, Inc.
  5. Datta, Sudip & Iskandar-Datta, Mai & Sharma, Vivek, 2011. "Product market pricing power, industry concentration and analysts' earnings forecasts," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(6), pages 1352-1366, June.
  6. Alimov, Azizjon, 2014. "Product market competition and the value of corporate cash: Evidence from trade liberalization," Journal of Corporate Finance, Elsevier, Elsevier, vol. 25(C), pages 122-139.
  7. Valta, Philip, 2012. "Competition and the cost of debt," Journal of Financial Economics, Elsevier, Elsevier, vol. 105(3), pages 661-682.
  8. Garcia-Appendini, Emilia, . "The Real Costs of Industry Contagion," Working Papers on Finance, University of St. Gallen, School of Finance 1410, University of St. Gallen, School of Finance.
  9. Bazdresch, Santiago, 2011. "Product differentiation and systematic risk: theory and empirical evidence," MPRA Paper 35504, University Library of Munich, Germany, revised 01 Nov 2011.
  10. Maria Cecillia Bustamante, 2011. "Strategic Investment, Industry Concentration and the Cross Section of Returns," FMG Discussion Papers, Financial Markets Group dp681, Financial Markets Group.
  11. Vivek Sharma, 2011. "Stock returns and product market competition: beyond industry concentration," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 37(3), pages 283-299, October.
  12. Jain, Bharat A. & Kini, Omesh & Shenoy, Jaideep, 2011. "Vertical divestitures through equity carve-outs and spin-offs: A product markets perspective," Journal of Financial Economics, Elsevier, Elsevier, vol. 100(3), pages 594-615, June.
  13. Maria Cecilia Bustamante, 2011. "Strategic investment, industry concentration and the cross section of returns," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 37454, London School of Economics and Political Science, LSE Library.

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