Concentration and stock returns: Australian evidence

Purpose: To examine economic determinants of the cross-sectional stock returns on the Australian stock market compared to the US market, and show that besides standard risk factors such that size and book-to-market ratio also the structure of the product market affects the average cross-section of stock returns. Originality: Given Australia's specific geographical and political features, as well as the government policies, the structure of the Australian market is very distinct from the US market structure. In contrast to the large open US economy with a lot of competition, Australia is a relatively small open-economy, its market structure resembles many firms which either singularly or jointly dominate their own industries. We show that the differences in the market structure lead to the different results when explaining the stock returns. Key literature / theoretical perspective: Motivated by the study of Hou and Robinson (2006), we address the issue of competition/concentration on the Australian stock market, comparing it to the US stock market. Design/methodology/approach: Besides the standard risk factors such that size, book-to-market ratio, earning-to-price ratio, cashow-to-price ratio, leverage and liquidity, we incorporate the structure of the product market by using concentration/competition measure. Findings: Comparing Australian market to the US market we find significant evidence that firms operating in concentrated industries generate higher risk-adjusted returns compared to firms in more competitive industries. Furthermore, while increasing concentration indicates lower average returns for large companies, it leads to an increase in average returns for small firms.