Product market competitiveness and return dynamics
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This dissertation examines whether stock performance of rivals is informative about a firm’s future stock return, and how the strength of predictability relates to product market competitiveness. My analysis reveals a short-lived yet pronounced stock return predictability between one firm and its rivals: a hedged portfolio that is long in the quintile of stocks with the highest prior rival returns and short in the quintile of stocks with the lowest prior rival returns yields an average monthly return of 1.79%. This pattern is stronger among small firms and firms with high arbitrage costs, consistent with the notion that gradual information flow induces predictability. Furthermore, it varies systematically with the degree of product market competitiveness that a firm faces: competitive and dynamic industries where rivals produce similar products are associated with stronger rival momentum. My findings contribute to the understanding of asset return dynamics and have important implications in the current environment of increasing industry concentration in the U.S. economy.