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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.

Suggested Citation

  • Gerard Hoberg & Gordon M. Phillips, 2008. "Real and Financial Industry Booms and Busts," NBER Working Papers 14290, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14290
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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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