Working Paper: NBER ID: w14290
Authors: Gerard Hoberg; Gordon M. Phillips
Abstract: We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock returns. We also find that analyst estimates are positively biased and returns comove more when industry valuations are high in competitive industries. In concentrated industries these relations are weak and generally insignificant. Our results suggest that when industry stock-market valuations are high, firms and investors in competitive industries do not fully internalize the negative externality of industry competition on cash flows and stock returns.
Keywords: product market competition; firm cash flows; stock returns; industry booms; industry busts
JEL Codes: G10; G14; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High Industry-Level Stock Market Valuation (G19) | Lower Operating Cash Flows (D25) |
| High Industry-Level Stock Market Valuation (G19) | Abnormal Stock Returns (G17) |
| New Financing (G32) | Lower Operating Cash Flows (D25) |
| High Industry-Level Valuation + High Investment (G31) | Predictable Busts (E32) |
| Competitive Dynamics (L13) | Analyst Forecast Performance (G17) |
| Failure to Internalize Competition (L13) | Predictable Busts (E32) |
| High Valuations in Concentrated Industries (L11) | Weak Relationships with Downturns (E32) |