Competition, profitability, and discount rates

Winston Dou, Yan Ji and Wei Wu

Journal of Financial Economics, 2021, vol. 140, issue 2, 582-620

Abstract: We build an asset-pricing model with dynamic strategic competition to explain the strong joint fluctuations in aggregate discount rates, competition intensity, profitability, and asset prices. Product market competition endogenously intensifies as discount rates rise, because firms compete more aggressively for current cash flows by undercutting each other as the value of future cooperation decreases. In industries with a lower turnover rate of market leaders, firms’ profit margins tend to be higher yet more exposed to discount-rate fluctuations, thereby generating the gross profitability premium. We exploit large tariff cuts to identify exogenous variation in market structure to test the core mechanism directly.

Keywords: Oligopoly; Profitability premium; Leadership persistence; Tariff shocks; Price wars (search for similar items in EconPapers)
JEL-codes: C73 G12 L13 O33 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:140:y:2021:i:2:p:582-620

DOI: 10.1016/j.jfineco.2020.12.013

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