# Product differentiation and systematic risk: theory and empirical evidence

## Author Info

Listed author(s):
• Bazdresch, Santiago

## Abstract

Firms producing differentiated products have high margins and therefore low risk. As a result firms invest more into developing differentiated products when they perceive risk is high. Higher risk also implies higher product skewness towards more differentiated products and therefore higher average markups. The model predicts endogenous systematic and idiosyncratic riskiness as well as endogenous intensity of competition: firms in high risk industries reduce their riskiness by competing less than firms in low risk industries. Empirical evidence on product differentiation, R\&D expenses, B/M ratios, and market $\beta$ is consistent with the model.

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File URL: https://mpra.ub.uni-muenchen.de/35504/1/MPRA_paper_35504.pdf
File Function: original version

## Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35504.

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 Length: Date of creation: 01 Oct 2011 Date of revision: 01 Nov 2011 Handle: RePEc:pra:mprapa:35504 Contact details of provider: Postal: Ludwigstraße 33, D-80539 Munich, GermanyPhone: +49-(0)89-2180-2459Fax: +49-(0)89-2180-992459Web page: https://mpra.ub.uni-muenchen.deMore information through EDIRC

## References

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1. José-Miguel Gaspar, 2006. "Idiosyncratic Volatility and Product Market Competition," The Journal of Business, University of Chicago Press, vol. 79(6), pages 3125-3152, November.
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8. Jonathan Berk & Richard C. Green & Vasant Naik, 1998. "Optimal Investment, Growth Options, and Security Returns," NBER Working Papers 6627, National Bureau of Economic Research, Inc.
9. Turan G. Bali & Nusret Cakici & Xuemin (Sterling) Yan & Zhe Zhang, 2005. "Does Idiosyncratic Risk Really Matter?," Journal of Finance, American Finance Association, vol. 60(2), pages 905-929, 04.
10. Fu, Fangjian, 2009. "Idiosyncratic risk and the cross-section of expected stock returns," Journal of Financial Economics, Elsevier, vol. 91(1), pages 24-37, January.
11. Felipe L. Aguerrevere, 2009. "Real Options, Product Market Competition, and Asset Returns," Journal of Finance, American Finance Association, vol. 64(2), pages 957-983, 04.
12. Nguyen, Giao X. & Swanson, Peggy E., 2009. "Firm Characteristics, Relative Efficiency, and Equity Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 213-236, February.
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