Strategic investment, industry concentration and the cross section of returns

Maria Cecilia Bustamante

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper provides an alternative real options framework to assess how firms' strategic interaction under imperfect competition a¤ects the industrial dynamics of investment, concentration, and expected returns. When firms have similar production technologies, the cross sectional variation in expected returns is low, firms' investments are more synchronized, firms' expected returns co-move positively, and the industry is less concentrated. Conversely, in more heterogeneous industries, the cross sectional variation in expected returns is high, there are leaders and followers whose expected returns co-move negatively, and the industry is more concentrated. The model rational- izes several empirical facts, including: (i) that firms' returns co-move more positively in less concentrated industries; (ii) that booms and busts in industry returns are more pronounced in less concentrated industries; and (iii) that less concentrated industries earn higher returns on average.

Keywords: expected returns; investment; imperfect competition; industry concentration (search for similar items in EconPapers)
JEL-codes: G11 G12 G31 L11 L12 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/37454/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:37454

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().