Competition risk and expected stock returns: In memory of Simon Benninga

This study suggests a new cause of risk, which is linked to companies’ level of competition. In perfect competition in the long-term, companies cease to enter or exit the market when marginal costs equal average costs. This research presents a new measure for companies’ competition risk, hinging on marginal cost divided by average costs in the long run (MCAC). As this ratio increases, the company becomes more distant from perfect competition. The current study investigates 107,613 U.S. firm-year observations and finds that highly competitive companies have higher expected stock returns.