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Real and Financial Industry Booms and Busts

  • Gerard Hoberg
  • Gordon M. Phillips

We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock returns. We also find that analyst estimates are positively biased and returns comove more when industry valuations are high in competitive industries. In concentrated industries these relations are weak and generally insignificant. Our results suggest that when industry stock-market valuations are high, firms and investors in competitive industries do not fully internalize the negative externality of industry competition on cash flows and stock returns.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14290.

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Date of creation: Aug 2008
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Publication status: published as Gerard Hoberg & Gordon Phillips, 2010. "Real and Financial Industry Booms and Busts," Journal of Finance, American Finance Association, vol. 65(1), pages 45-86, 02.
Handle: RePEc:nbr:nberwo:14290
Note: AP CF
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