Abstract:
This paper investigates the association between industry concentration and stock return
on equity, persistence of returns and market to book value ratios of stocks in Australia
between 1991 and 2003. During this period the market to book value ratios of firms
increased steadily. Consistent with prior overseas studies, this study provides evidence of
a significant association between industry concentration and the persistence of returns on
equity. This study extends earlier industry concentration studies by providing evidence
that for dominant firms in an industry group there is also a positive association between
industry dominance and persistence of returns. This is consistent with industry
concentration and firm dominance of industry being associated with a reduced rate of
mean reversion of firm returns.
The paper finds a weak association between industry concentration and level of ROE, an
association which strengthens when previous period's ROE is controlled for in the
regression. The findings call for further research into earnings persistence using more
refined industry classification data.
