Industry Competition and Common Stock Returns

Senarathne Chamil W. () and Long Wei ()
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Senarathne Chamil W.: School of Economics, Wuhan University of Technology, Wuhan, China
Long Wei: School of Economics, Wuhan University of Technology, Wuhan, China

Management Sciences. Nauki o Zarządzaniu, 2019, vol. 24, issue 3, 24-35

Abstract: This paper examines the relationship between industry competitiveness and common stock returns of twenty listed firms of the Colombo Stock Exchange. The Herfindahl (1950) H index is extended to include the variance of cross sectional earnings dispersion that accounts for the relative competition of an industry. The regression results show that the industry competitiveness is unrelated to common stock returns when the extended H index is included in the regression specification as a common factor. Although the overall market factor (i.e. market return) remains statistically significant, coefficients of extended H index together with two other controlled factors become statistically insignificant in the regression. These findings suggest that the risk pertaining to industry competition is not priced as it could be diversified away by the appropriately managed value chain of the individual firms and, as such, no compensation for the risk of industry competition is demanded.

Keywords: industry competitiveness; common stock return; competitive position; value chain innovation; Herfindahl index (search for similar items in EconPapers)
JEL-codes: D41 G12 G17 L22 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:mansci:v:24:y:2019:i:3:p:24-35:n:4

DOI: 10.15611/ms.2019.3.04

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