Market Power, Technology Shocks, and the Profitability Premium
Research output: Conference Papers › RGC 33 - Other conference paper
Author(s)
Related Research Unit(s)
Detail(s)
Original language | English |
---|---|
Number of pages | 34 |
Publication status | Presented - 29 Jun 2024 |
Conference
Title | 2024 Asian Meeting of Econometric Society in China (AMES2024-China) |
---|---|
Location | Zhejiang University |
Place | China |
City | Hangzhou |
Period | 28 - 30 June 2024 |
Link(s)
Document Link | Links
|
---|---|
Permanent Link | https://scholars.cityu.edu.hk/en/publications/publication(1943eab7-63d0-47bc-8ddf-d8e98c61e168).html |
Abstract
This paper studies how market power affects the well-documented positive relation between firms’ profitability and future stock returns in the cross-section. We find that this relation is significantly more pronounced among firms with high markup. A long-short portfolio sorted on profitability earns an average monthly return of 0.57% among firms with high markup, and only 0.05% among firms with low markup. Firms’ differential exposure to investment-specific technology shocks explains this gap. To understand these results, we introduce market power into a standard investment-based asset pricing model to study its impact on firms’ endogenous investment and risk exposures. Market power exacerbates the displacement risk faced by highly profitable firms.
Research Area(s)
Citation Format(s)
Market Power, Technology Shocks, and the Profitability Premium. / Deng, Yao; Luo, Ding; Tong, Jincheng.
2024. 2024 Asian Meeting of Econometric Society in China (AMES2024-China), Hangzhou, China.
2024. 2024 Asian Meeting of Econometric Society in China (AMES2024-China), Hangzhou, China.
Research output: Conference Papers › RGC 33 - Other conference paper