Market Power, Technology Shocks, and the Profitability Premium

Research output: Conference PapersRGC 33 - Other conference paper

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Detail(s)

Original languageEnglish
Number of pages34
Publication statusPresented - 29 Jun 2024

Conference

Title2024 Asian Meeting of Econometric Society in China (AMES2024-China)
LocationZhejiang University
PlaceChina
CityHangzhou
Period28 - 30 June 2024

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.

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.

Research output: Conference PapersRGC 33 - Other conference paper