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Industry Concentration and Average Stock Returns




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    • Kewei Hou is from the Fisher College of Business at The Ohio State University, and David T. Robinson is from the Fuqua School of Business at Duke University. We thank Alon Brav, Anne-Marie Knott, Robert Stambaugh (the editor), Lu Zhang, seminar participants at the 2005 WFA meetings, Ohio State, The University of Arizona, George Mason University, and an anonymous referee for many helpful comments. This paper is a significantly revised version of a paper entitled, “Market Structure, Firm Size, and Expected Stock Returns.” Judith Chevalier, Eugene Fama, Peter Hecht, Owen Lamont, Toby Moskowitz, Per Olsson, Per Strömberg, and seminar participants at The University of Chicago and the Chicago Quantitative Alliance provided many helpful comments on this earlier draft. Any remaining errors are our own.


Firms in more concentrated industries earn lower returns, even after controlling for size, book-to-market, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent in-sample cash flow shocks do not explain this finding. Drawing on work in industrial organization, we posit that either barriers to entry in highly concentrated industries insulate firms from undiversifiable distress risk, or firms in highly concentrated industries are less risky because they engage in less innovation, and thereby command lower expected returns. Additional time-series tests support these risk-based interpretations.

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