Product Market Competition and Equity Returns
Masahiro Watanabe (University of Alberta)
We develop an analytically tractable equilibrium model to examine the link between competition in product markets and stock returns. Firms maximize profits from the sale of their products to consumers, who maximize their expected utility. Investors receive firm profits as investment returns. We characterize firms' optimal production plans and expected equity returns, and show that firm heterogeneity within an industry leads to differences in "production risk premia" across firms. In addition, we demonstrate that the intensity of product market competition can have different effects on expected returns of firms with different characteristics. The model further suggests that the size and value effects may partly arise at the industry level. We show empirically that the compensation for bearing cash flow risk resulting from competition in output markets is economically significant and that product market competition is associated with expected returns in ways that are consistent with the model.
- 講 師：
- Masahiro Watanabe (University of Alberta)
- Product Market Competition and Equity Returns
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