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Industry Concentration, Excess Returns and Innovation in Australia

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  • David R. Gallagher

    (Macquarie Graduate School of Management)

  • Katja Ignatieva

    (Australian School of Business, University of New South Wales)

  • James McCulloch

    (Quantitative Finance Research Centre, University of Technology, Sydney)

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    Abstract

    This paper examines market concentration and stock returns on the Australian Securities Exchange. We find that dominant companies operating in concentrated industries in Australia are able to generate significant risk-adjusted excess stock returns and excess profits on sales (monopoly rents). Our results for Australian data are opposite to that found by Hou and Robinson (2006) for United States market data. Hou and Robinson reason that U.S. firms which operate in concentrated industries are insulated from competitive pressures, have lower levels of innovation (Arrow (1962)) and therefore experience lower profitability and stock returns. The high stock returns of dominant companies in Australia is consistent with Schumpeter’s (1942) theory of innovation where monopoly excess profits are necessary to fund corporate innovation. We hypothesize that the apparent contradiction of our results compared with Hou and Robinson (2006) for the United States market is resolved by an examination of the differences in size and competition in U.S. and Australian industries and the consequent differential ability of dominant companies in the two countries to generate monopoly rents.

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    Bibliographic Info

    Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 334.

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    Length: 32
    Date of creation: 01 Jul 2013
    Date of revision:
    Handle: RePEc:uts:rpaper:334

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