Industry Concentration and the Cross-section of Stock Returns: Evidence from the UK
AbstractIn 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 28440.
Date of creation: Mar 2010
Date of revision: Nov 2010
Industry concentration; Stock returns; Multifactor asset pricing theory; Competitive industries; Concentrated industries; Creative destruction; London Stock Exchange;
Find related papers by JEL classification:
- G1 - Financial Economics - - General Financial Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-05 (All new papers)
- NEP-COM-2011-02-05 (Industrial Competition)
- NEP-HME-2011-02-05 (Heterodox Microeconomics)
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