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Industry Concentration and Average Stock Returns
Author(s) -
HOU KEWEI,
ROBINSON DAVID T.
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.00893.x
Subject(s) - stock (firearms) , cash flow , economics , monetary economics , momentum (technical analysis) , financial economics , financial distress , econometrics , finance , financial system , engineering , mechanical engineering
Firms in more concentrated industries earn lower returns, even after controlling for size, book‐to‐market, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent in‐sample cash flow shocks do not explain this finding. Drawing on work in industrial organization, we posit that either barriers to entry in highly concentrated industries insulate firms from undiversifiable distress risk, or firms in highly concentrated industries are less risky because they engage in less innovation, and thereby command lower expected returns. Additional time‐series tests support these risk‐based interpretations.