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Competition risk and expected stock returns

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  • Taussig, Roi D.

Abstract

This study suggests a new cause of risk, which is linked to companies’ level of competition. In perfect competition in the long-term, companies cease to enter or exit the market when marginal costs equal average costs. This research presents a new measure for companies’ competition risk, hinging on marginal cost divided by average costs in the long run (MCAC). As this ratio increases, the company becomes more distant from perfect competition. The current study investigates 107,613 U.S. firm-year observations and finds that highly competitive companies have higher expected stock returns.

Suggested Citation

  • Taussig, Roi D., 2021. "Competition risk and expected stock returns," Finance Research Letters, Elsevier, vol. 41(C).
    • Handle: RePEc:eee:finlet:v:41:y:2021:i:c:s1544612320316743
    DOI: 10.1016/j.frl.2020.101860
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    More about this item

    Keywords

    stock return; cost; asset pricing; cross-section returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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