Industry Concentration, Sticky Profits, and Return Dynamics
By Yanki Kalfa in Working-Paper
Firms in highly concentrated industries have higher return volatility. This is due to the increased sensitivity to economic cycles in expected returns and conditional volatility. This paper analyzes the relationship between industry concentration and returns by estimating a dynamic factor model with systematic and industry-specific factors. Empirical findings show that concentrated industries experience larger expected profit growth persistence relative to competitive industries. Consistent with theory, this paper demonstrates that concentrated industries offer a higher risk premium relative to competitive ones, but face larger volatility during economic downturns.