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Industry Concentration and the Cross-Section of Stock Returns: Evidence from the UK

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  • Nawar Hashem
  • Larry Su

Abstract

In this paper, we examine the relationship between market structure and ex- pected stock returns in the London Stock Exchange during 1985 and 2010. Using Fama- MacBeth regressions, we find that industry concentration is negatively related to average stock returns, even after controlling for beta, size, book-to-market equity, momentum, and leverage. In addition, there is a strong evidence of a growth effect. Firms or industry portfolios with smaller book-to-market ratios have significantly higher returns. In contrast, beta is never statistically significant. The above results are robust to firm- and industry- level regressions, and the formation of firms into 100 size-beta portfolios. Our findings indicate that competitive industries earn, on average, higher risk-adjusted returns than concentrated industries. An explanation is that investors in more competitive industries require larger premiums for greater distress risks associated with these industries. Our paper is one of the first to link market competition with the average stock returns in the UK, and contributes to the asset pricing literature by extending the evidence from the US to another important financial market.

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  • Nawar Hashem & Larry Su, 2015. "Industry Concentration and the Cross-Section of Stock Returns: Evidence from the UK," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(4), pages 769-785, August.
    • Handle: RePEc:taf:jbemgt:v:16:y:2015:i:4:p:769-785
    DOI: 10.3846/16111699.2013.833547
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    Cited by:

    1. Senarathne Chamil W. & Long Wei, 2019. "Industry Competition and Common Stock Returns," Management Sciences. Nauki o Zarządzaniu, Sciendo, vol. 24(3), pages 24-35, September.
    2. Usman Sattar & Sohail Ahmad Javeed & Rashid Latief, 2020. "How Audit Quality Affects the Firm Performance with the Moderating Role of the Product Market Competition: Empirical Evidence from Pakistani Manufacturing Firms," Sustainability, MDPI, vol. 12(10), pages 1-20, May.
    3. Huong Le & Andros Gregoriou & Tung Nguyen, 2023. "Advertising, product market competition and stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1605-1628, May.
    4. Nidhi Kaicker & Radhika Aggarwal, 2023. "Market Structure and Firm Level Returns: The Indian Evidence," International Journal of Global Business and Competitiveness, Springer, vol. 18(1), pages 59-69, June.
    5. Nawar Hashem & Larry Su, 2019. "Internationalization and the Cross-section of Stock Returns: Evidence from Multinational Corporations Publicly Listed in the U.K," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(3), pages 245-263, December.
    6. Thu A. T. Pham, 2018. "Industry Concentration, Firm Efficiency and Average Stock Returns: Evidence from Australia," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 25(3), pages 221-247, September.

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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