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Strategic investment, industry concentration and the cross section of returns

  • Maria Cecilia Bustamante
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    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.

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    File URL: http://eprints.lse.ac.uk/37454/
    File Function: Open access version.
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    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 37454.

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    Date of creation: Jun 2011
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    Handle: RePEc:ehl:lserod:37454
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    Web page: http://www.lse.ac.uk/

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