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Strategic investment, industry concentration and the cross section of returns

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  • Bustamante, Maria Cecilia

Abstract

This paper provides an alternative real options framework to assess how firms' strategic interaction under imperfect competition a¤ects the industrial dynamics of investment, concentration, and expected returns. When firms have similar production technologies, the cross sectional variation in expected returns is low, firms' investments are more synchronized, firms' expected returns co-move positively, and the industry is less concentrated. Conversely, in more heterogeneous industries, the cross sectional variation in expected returns is high, there are leaders and followers whose expected returns co-move negatively, and the industry is more concentrated. The model rational- izes several empirical facts, including: (i) that firms' returns co-move more positively in less concentrated industries; (ii) that booms and busts in industry returns are more pronounced in less concentrated industries; and (iii) that less concentrated industries earn higher returns on average.

Suggested Citation

  • Bustamante, Maria Cecilia, 2011. "Strategic investment, industry concentration and the cross section of returns," LSE Research Online Documents on Economics 37454, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:37454
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    File URL: http://eprints.lse.ac.uk/37454/
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    References listed on IDEAS

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    More about this item

    Keywords

    expected returns; investment; imperfect competition; industry concentration;

    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
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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