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Industry concentration, excess returns and innovation in A ustralia
Author(s) -
Gallagher David R.,
Ignatieva Katja,
McCulloch James
Publication year - 2015
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12074
Subject(s) - stock (firearms) , profitability index , economics , excess return , competition (biology) , monetary economics , finance , engineering , mechanical engineering , paleontology , ecology , biology , context (archaeology)
This paper examines market concentration and stock returns on the A ustralian S ecurities E xchange. We find that dominant companies operating in concentrated industries in A ustralia are able to generate significant risk‐adjusted excess stock returns. Our results for A ustralian data are opposite to that found by Hou and Robinson (2006) for U nited S tates market data. H ou and R obinson reason that U nited S tates 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. By contrast, the Australian data show a significant and positive relationship between concentration and innovation expenditure. Therefore, the excess stock returns of dominant companies in A ustralia are consistent with previous research linking innovation expenditure with excess stock returns. We hypothesize that the apparent contradiction of our results compared with Hou and Robinson (2006) for the U nited S tates market is resolved by an examination of the differences in size and competition in U nited S tates and A ustralian industries and the consequent differential ability of dominant companies in the two countries to generate monopoly rents and invest in ‘ S chumpeterian’ (Schumpeter, 1942) innovation.