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Leaders, Followers, and Risk Dynamics in Industry Equilibrium

Published online by Cambridge University Press:  04 June 2014

Murray Carlson ,
Engelbert J. Dockner ,
Adlai Fisher  and
Ron Giammarino
Murray Carlson
Affiliation:
murray.carlson@sauder.ubc.ca, Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada
Engelbert J. Dockner
Affiliation:
engelbert.dockner@wu.ac.at, Wirtschaftsuniversität Wien, Vienna University of Economics and Business, Heiligenstaedter Strasse 46-48, Vienna A-1190, Austria
Adlai Fisher
Affiliation:
adlai.fisher@sauder.ubc.ca, Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada
Ron Giammarino
Affiliation:
ron.giammarino@sauder.ubc.ca, Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada
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Abstract

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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 2 , April 2014 , pp. 321 - 349
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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