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Industry Concentration and the Cross-section of Stock Returns: Evidence from the UK

Nawar Hashem (nhashem@hotmail.co.uk)

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, I examine the relationship between industry concentration and the cross-section of stock returns in the London Stock Exchange between 1985 and 2010. Using Multifactor asset pricing theory, I test whether industry concentration is a new asset pricing factor in addition to conventional risk factors such as beta, firm size, book-to-market ratio, momentum, and leverage. I find that industry concentration is negatively related to the expected stock returns in all Fama and MacBeth cross-sectional regressions. In addition, the negative relationship between industry concentration and expected stock returns remain significantly negative after beta, size, book-to-market, momentum, and leverage are included, while beta is never significant. The results are robust to firm- and industry-level regressions and the formation of firms into 100 size-beta portfolios. The findings indicate that competitive industries earn, on average, higher risk-adjusted returns compared to concentrated industries which is consistent with Schumpeter’s concept of creative destruction.

Keywords: Industry concentration; Stock returns; Multifactor asset pricing theory; Competitive industries; Concentrated industries; Creative destruction; London Stock Exchange (search for similar items in EconPapers)
JEL-codes: G1 G12 (search for similar items in EconPapers)
Date: 2010-03, Revised 2010-11
New Economics Papers: this item is included in nep-com and nep-hme
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Related works:
Journal Article: Industry Concentration and the Cross-Section of Stock Returns: Evidence from the UK (2015) Downloads
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