大阪大学　数理・データ科学教育研究センター
Center for Mathematical Modeling and Data Science,Osaka University

Product Market Competition and Equity Returns

Masahiro Watanabe (University of Alberta)

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大証寄附研究部門セミナーシリーズ 第23回

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.