Leaders, Followers, and Risk Dynamics in Industry Equilibrium. (4th June 2014)

• Record Type: Journal Article
• Authors: Carlson, Murray; Dockner, Engelbert J.; Fisher, Adlai; Giammarino, Ron
• Is Part Of: Journal of financial and quantitative analysis. Volume 49:Number 2(2015)
• Page Start: 321
• Page End: 349
• Publication Date: 2014-06-04
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109014000337
• Languages: English
• ISSNs: 0022-1090

Abstract

<abstract abstract-type="normal"> <title>Abstract</title> <p>We study the distinct impacts of own and rival actions on risk and return when firms strategically compete in the product market. Contrary to simple intuition, a competitor's options to adjust capacity reduce own-firm risk. For example, if a rival possesses a growth option, an increase in industry demand directly enhances profits but also encourages value-reducing competitor expansion. The rival option thus acts as a natural hedge. Within the industry, we obtain endogenous differences in expected returns. In a leader-follower equilibrium, own-firm and competitor risks and required returns move together through contractions and oppositely during expansions, providing testable new predictions.</p> </abstract>