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Competition Shocks, rival reactions and return comovement

Roll, Richard and de Bodt, Eric and Eckbo, B. Espen (2021) Competition Shocks, rival reactions and return comovement. Social Science Working Paper, 1463. California Institute of Technology , Pasadena, CA. (Unpublished)

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We estimate changes in within-industry stock-return comovement caused by the reaction of rival firms to significant tariff cuts. In theory, rivals react by either increasing or decreasing product differentiation. Increased differentiation lowers cash flow correlation and return comovement, while reduced differentiation increases comovement. Large-sample tests show that tariff cuts in manufacturing industries increase comovement and more so for within-industry 'followers' than 'leaders'. The notion that this comovement-increase reflects efficiency-enhancing rival reactions is also supported by evidence of increased cost-efficiency measures. One channel for this efficiency-increase is M&A activity among industry followers.

Item Type:Report or Paper (Working Paper)
de Bodt, Eric0000-0002-1789-6507
Group:Social Science Working Papers
Subject Keywords:Return comovement, inframarginal rent, competition shock, rival reaction, product differentiation, scale economies, industry follower
Series Name:Social Science Working Paper
Issue or Number:1463
Classification Code:GEL classification: G34, G38, L10, L25
Record Number:CaltechAUTHORS:20220415-223243515
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:114353
Deposited By: Kapauhi Stibbard
Deposited On:15 Apr 2022 23:07
Last Modified:15 Apr 2022 23:07

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