1. Stock Return Dependence and Product Market Linkages
Hossein Asgharian1,3; Lu Liu2,3
1Lund University, 2Stockholm University, 3Knut Wicksell Centre for Financial Studies
Summary
Purpose
How much do the stock returns of US publicly traded firms respond to the return shocks of competitors and customers?
What is the speed of shock transmission?
How does the magnitude of shock transmission depend on product-market characteristics?
Contribution
Investigate instantaneous transmission of shocks in addition to testing lead-lag effect.
Capture two opposite effects among rivals, contagion effect (positive effect) and competition effect (negative effect).
Show that the degree of firms’ sensitivity to major customers is related to customer-base concentration and product uniqueness.
Study the effects of rivals and major customers in one model, controlling for the effect of the firms’ potential customers and potential suppliers.
Econometric Method
A spatial Durbin model
Data and Definition of Variables
Data
Major customers: customers that account for 10% or more of a firm’s yearly revenues, from Compustat’s Custom Business Unit database,
Rivals: Text-based network industry classifications1,2.
Daily stock returns: CRSP, mid-1997 to mid-2015.
Accounting variables: Compustat,
Variables on product-market characteristics
Herfindahl-Hirschman Index.
Product market fluidity: the change in a firm’s product space1,2.
Customer base concentration:
Product similarity: the extent to which the product of the firm is similar to those of its rivals 1,2.
Results
Shock transmission
Responses to rivals and major customers’ stock return shocks are the strongest contemporaneously and diminish rapidly thereafter.
Asymmetric response to positive shocks and negative shocks
A firm’s stock return is more sensitive to related firms’ negative return shocks than to their positive return shocks
Rivals
Major Customers
Diff
0.087***
0.118***
0.031***
0.032***
0.043***
0.011*
1 Hoberg, G. and Phillips G Text-Based Network Industries and Endogenous Product Differentiation. Journal of Political Economy 124 (5),
2 Hoberg, G. and Phillips G Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis. Review of Financial Studies 23 (10),
Contact: Lu Liu