Industry competition and fundamental analysis. (27th October 2016)

• Record Type: Journal Article
• Authors: Safdar, Irfan
• Is Part Of: Journal of accounting literature. Volume 37(2016)
• Page Start: 36
• Page End: 54
• Publication Date: 2016-10-27
• Subjects: Financial statement analysis -- Industry competition -- Stock return predictability; Accounting literature -- Periodicals; Accounting -- Periodicals; Accountancy; Comptabilité -- Documentation -- Périodiques; Comptabilité -- Périodiques; Accounting; Accounting literature; Periodicals; 657.05
• DOI: 10.1016/j.acclit.2016.09.001
• Languages: English
• ISSNs: 0737-4607

Abstract

Abstract : Economic theory suggests that profits of firms in industries with higher competition are less persistent and more volatile than in industries with lower competition (Stigler, 1963; Mueller, 1977). Extending this reasoning, I hypothesize that accounting-based fundamentals are more effective in predicting performance in industries with lower competition. I find that a measure of fundamentals (Piotroski's F-score) has greater ability to identify potentially mispriced securities in industries with lower competition. The results are robust to using a variety of competition measures and imply that industry competition is an important consideration in the application of fundamental analysis.