Product differentiation and systematic risk: theory and empirical evidence
AbstractFirms 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 35504.
Date of creation: 01 Oct 2011
Date of revision: 01 Nov 2011
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;
Find related papers by JEL classification:
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-25 (All new papers)
- NEP-BEC-2012-01-25 (Business Economics)
- NEP-COM-2012-01-25 (Industrial Competition)
- NEP-IND-2012-01-25 (Industrial Organization)
- NEP-INO-2012-01-25 (Innovation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Gerard Hoberg & Gordon M. Phillips, 2008.
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NBER Working Papers
14290, National Bureau of Economic Research, Inc.
- 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.
- 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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