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Industry classification, industry concentration, and stock returns

Author

Listed:
  • Scott Li

    (California State University–Los Angeles)

  • James Refalo

    (California State University–Los Angeles)

  • Jong-Hwan Yi

    (California State University–Los Angeles)

Abstract

This paper analyzes the relationship between industry concentration level and stock returns under different levels of industry classification in the USA. We find that the effect varies significantly across different levels of industry classification. Such variation cannot be fully explained by common risk factors such as size, book-to-market ratio, and momentum. The relationship also varies by different sample periods that characterize market microstructure evolution from 1963 to 2019. Two-digit SICCD and Fama French 48 industry classification appear to generate much higher returns from industry concentration level high-minus-low portfolios during the industry consolidation era (1998–2019). The results support both Schumpeter’s theories.

Suggested Citation

  • Scott Li & James Refalo & Jong-Hwan Yi, 2025. "Industry classification, industry concentration, and stock returns," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 39(3), pages 337-363, September.
    • Handle: RePEc:kap:fmktpm:v:39:y:2025:i:3:d:10.1007_s11408-025-00470-z
    DOI: 10.1007/s11408-025-00470-z
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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