Industry Concentration and the Cross Section of Expected Stock Returns: A Global Perspective

Abstract

Under economic theory, firms operating under monopolistic or oligopolistic competition are more profitable and can be expected to deliver higher returns to their shareholders. As such, industry concentration should have a positive relationship with the cross-section of stock returns. Studies by Hou and Robinson on the U.S. market; Hashem and Su on the U.K. market; and Gallagher, Ignatieva, and McCulloch on the Australian market did not reach consensus. The U.S. and U.K. studies found the relationship to be negative, whereas the Australian study showed evidence of a positive relationship. Motivated by this lack of consensus across markets, the authors re-examined this relationship from a global perspective. We find evidence that highly concentrated industries, on average, are more profitable and achieve higher expected returns even after controlling for size, book-to-market, and momentum.