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Product differentiation and systematic risk: theory and empirical evidence

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  • Bazdresch, Santiago

Abstract

Firms producing differentiated products have high margins and therefore low risk. As a result firms invest more into developing differentiated products when they perceive risk is high. Higher risk also implies higher product skewness towards more differentiated products and therefore higher average markups. The model predicts endogenous systematic and idiosyncratic riskiness as well as endogenous intensity of competition: firms in high risk industries reduce their riskiness by competing less than firms in low risk industries. Empirical evidence on product differentiation, R\&D expenses, B/M ratios, and market $\beta$ is consistent with the model.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35504.

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Date of creation: 01 Oct 2011
Date of revision: 01 Nov 2011
Handle: RePEc:pra:mprapa:35504

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Related research

Keywords: Stock Returns; Price Differentiation; Product Market Competition; Product Development; Idiosyncratic Volatility; Research and Development; Counter-Cyclical Markups; Price of Risk; Price-Cost Margin; Investment; Innovation;

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  1. Joel Peress, 2010. "Product Market Competition, Insider Trading, and Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 65(1), pages 1-43, 02.
  2. Gerard Hoberg & Gordon M. Phillips, 2008. "Real and Financial Industry Booms and Busts," NBER Working Papers 14290, National Bureau of Economic Research, Inc.
  3. Kewei Hou & David T. Robinson, 2006. "Industry Concentration and Average Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1927-1956, 08.
  4. Amit Goyal & Pedro Santa-Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, vol. 58(3), pages 975-1008, 06.
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