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Industry Competition and Common Stock Returns

Author

Listed:
  • Senarathne Chamil W.

    (School of Economics, Wuhan University of Technology, Wuhan, China)

  • Long Wei

    (School of Economics, Wuhan University of Technology, Wuhan, China)

Abstract

This paper examines the relationship between industry competitiveness and common stock returns of twenty listed firms of the Colombo Stock Exchange. The Herfindahl (1950) H index is extended to include the variance of cross sectional earnings dispersion that accounts for the relative competition of an industry. The regression results show that the industry competitiveness is unrelated to common stock returns when the extended H index is included in the regression specification as a common factor. Although the overall market factor (i.e. market return) remains statistically significant, coefficients of extended H index together with two other controlled factors become statistically insignificant in the regression. These findings suggest that the risk pertaining to industry competition is not priced as it could be diversified away by the appropriately managed value chain of the individual firms and, as such, no compensation for the risk of industry competition is demanded.

Suggested Citation

  • 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.
  • Handle: RePEc:vrs:mansci:v:24:y:2019:i:3:p:24-35:n:4
    DOI: 10.15611/ms.2019.3.04
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    References listed on IDEAS

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    More about this item

    Keywords

    industry competitiveness; common stock return; competitive position; value chain innovation; Herfindahl index;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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