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Industry competition and fundamental analysis

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  • Safdar, Irfan

Abstract

Economic theory suggests that profits of firms in industries with higher competition are less persistent and more volatile than in industries with lower competition (Stigler, 1963; Mueller, 1977). Extending this reasoning, I hypothesize that accounting-based fundamentals are more effective in predicting performance in industries with lower competition. I find that a measure of fundamentals (Piotroski’s F-score) has greater ability to identify potentially mispriced securities in industries with lower competition. The results are robust to using a variety of competition measures and imply that industry competition is an important consideration in the application of fundamental analysis.

Suggested Citation

  • Safdar, Irfan, 2016. "Industry competition and fundamental analysis," Journal of Accounting Literature, Elsevier, vol. 37(C), pages 36-54.
    • Handle: RePEc:eee:joacli:v:37:y:2016:i:c:p:36-54
    DOI: 10.1016/j.acclit.2016.09.001
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