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Industry Concentration, Excess Returns and Innovation in Australia

Author

Listed:
  • David R. Gallagher

    (Macquarie Graduate School of Management)

  • Katja Ignatieva

    (Australian School of Business, University of New South Wales)

  • James McCulloch

    (Quantitative Finance Research Centre, University of Technology, Sydney)

Abstract

This paper examines market concentration and stock returns on the Australian Securities Exchange. We find that dominant companies operating in concentrated industries in Australia are able to generate significant risk-adjusted excess stock returns and excess profits on sales (monopoly rents). Our results for Australian data are opposite to that found by Hou and Robinson (2006) for United States market data. Hou and Robinson reason that U.S. firms which operate in concentrated industries are insulated from competitive pressures, have lower levels of innovation (Arrow (1962)) and therefore experience lower profitability and stock returns. The high stock returns of dominant companies in Australia is consistent with Schumpeter’s (1942) theory of innovation where monopoly excess profits are necessary to fund corporate innovation. We hypothesize that the apparent contradiction of our results compared with Hou and Robinson (2006) for the United States market is resolved by an examination of the differences in size and competition in U.S. and Australian industries and the consequent differential ability of dominant companies in the two countries to generate monopoly rents.

Suggested Citation

  • David R. Gallagher & Katja Ignatieva & James McCulloch, 2013. "Industry Concentration, Excess Returns and Innovation in Australia," Research Paper Series 334, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:334
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    References listed on IDEAS

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    Cited by:

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    2. Nawar Hashem & Larry Su, 2015. "Industry Concentration and the Cross-Section of Stock Returns: Evidence from the UK," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(4), pages 769-785, August.
    3. Mouna Abdelhedi-Zouch & Achraf Ghorbel, 2016. "Islamic and conventional bank market value: Manager behavior and investor sentiment," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1164010-116, December.
    4. Li, Scott & Liu, Qianqiu & Refalo, James, 2020. "Industry classification, product market competition, and firm characteristics," Finance Research Letters, Elsevier, vol. 36(C).
    5. Raghavan J. Iyengar & Malavika Sundararajan, 2019. "Is Firm Innovation Associated With Corporate Governance?," International Journal of Innovation Management (ijim), World Scientific Publishing Co. Pte. Ltd., vol. 24(03), pages 1-24, April.
    6. Nawar Hashem & Larry Su, 2019. "Internationalization and the Cross-section of Stock Returns: Evidence from Multinational Corporations Publicly Listed in the U.K," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(3), pages 245-263, December.
    7. Doowon Ryu & Doojin Ryu & Joon Ho Hwang, 2017. "Corporate governance, product-market competition, and stock returns: evidence from the Korean market," Asian Business & Management, Palgrave Macmillan, vol. 16(1), pages 50-91, April.
    8. Thu A. T. Pham, 2018. "Industry Concentration, Firm Efficiency and Average Stock Returns: Evidence from Australia," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 25(3), pages 221-247, September.

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