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Industry Concentration and the Cross-section of Stock Returns: Evidence from the UK

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  • Nawar, Hashem

Abstract

In this paper, I examine the relationship between industry concentration and the cross-section of stock returns in the London Stock Exchange between 1985 and 2010. Using Multifactor asset pricing theory, I test whether industry concentration is a new asset pricing factor in addition to conventional risk factors such as beta, firm size, book-to-market ratio, momentum, and leverage. I find that industry concentration is negatively related to the expected stock returns in all Fama and MacBeth cross-sectional regressions. In addition, the negative relationship between industry concentration and expected stock returns remain significantly negative after beta, size, book-to-market, momentum, and leverage are included, while beta is never significant. The results are robust to firm- and industry-level regressions and the formation of firms into 100 size-beta portfolios. The findings indicate that competitive industries earn, on average, higher risk-adjusted returns compared to concentrated industries which is consistent with Schumpeter’s concept of creative destruction.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28440.

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Date of creation: Mar 2010
Date of revision: Nov 2010
Handle: RePEc:pra:mprapa:28440

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Keywords: Industry concentration; Stock returns; Multifactor asset pricing theory; Competitive industries; Concentrated industries; Creative destruction; London Stock Exchange;

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  1. Ian Tonks & Mark T Hon, 2002. "Mommentum in the UK Stock Market," FMG Discussion Papers dp405, Financial Markets Group.
  2. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  3. Weimin Lui & Norman Strong & Xinzhong Xu, 1999. "The Profitability of Momentum Investing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(9-10), pages 1043-1091.
  4. Miles, David & Timmermann, Allan, 1996. "Variation in Expected Stock Returns: Evidence on the Pricing of Equities from a Cross-Section of UK Companies," Economica, London School of Economics and Political Science, vol. 63(251), pages 369-82, August.
  5. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  6. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
  7. Daniel Chi-Hsiou Hung & Mark Shackleton & Xinzhong Xu, 2004. "CAPM, Higher Co-moment and Factor Models of UK Stock Returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(1-2), pages 87-112.
  8. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
  9. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
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