Dynamic Collusion, Vertical Competition, and Systematic Risk

This paper empirically investigates how exposures of an industry’s cash flows and stock returns to discount rate shocks are affected by the market concentration of its upstream and downstream industries. In the cross-section of U.S. industries, we find that industries’ cash flows and stock returns are more negatively exposed to fluctuations in the aggregate discount rate if their upstream or downstream industries are more concentrated. These industries also have higher expected stock returns and costs of capital. Our study highlights the role of vertical competition in determining firm risk exposure and expected returns. This paper was accepted by Lukas Schmid, finance. Funding: K. C. J. Wei received partial financial support from the Research Grants Council of the Hong Kong Special Administrative Region, China [Project 15510222]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.04715 .