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Real and Financial Industry Booms and Busts




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    • University of Maryland and University of Maryland and National Bureau of Economic Research (NBER), respectively. Hoberg can be reached at and Phillips can be reached at We especially thank Matthew Rhodes-Kropf and David Robinson for many helpful comments. We also thank Malcolm Baker, Ron Giammarino, Bill Latham, Josh Lerner, Tim Loughran, L̆ubos̆ Pástor, Paul Povel, Paul Seguin, the editor (Campbell Harvey), an anonymous associate editor, an anonymous referee, and seminar participants at the AEA meetings, the 2007 Frontiers of Finance Conference, American University, Baruch, Delaware, George Mason, Georgia State, Insead, NBER, New York University, Oxford, University of British Columbia, Vanderbilt, University of Vienna, Washington University of St. Louis, the Western Finance Association, and Yale for helpful comments. All errors are the authors' alone.


We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. Our results show how real and financial factors interact in industry business cycles. In competitive industries, we find that high industry-level stock market valuation, investment, and financing are followed by sharply lower operating cash flows and abnormal stock returns. Analyst estimates are positively biased and returns comove more. In concentrated industries these relations are weak and generally insignificant. Our results are consistent with participants in competitive industries not fully internalizing the negative externality of industry competition on cash flows and stock returns.