Product Market Competition And Idiosyncratic Risk: Theoretical Model And Empirical Evidence

Over the past few years, the volatility of the average stock return, or idiosyncratic risk, has drastically outpaced total market volatility in the U.S. and global capital markets. And the typical economic consequences of the dramatically volatility is the inter-related decline in firms' product market competition performance (PMC) and its stock market efficiency (SME). Growing body of foreign literature has directly attributed the significant increasing trend of idiosyncratic return volatility to the increasingly fierce economy-wide competition. This paper focuses on whether our capital market also has such phenomenon? Whether the significant increasing trend of idiosyncratic risk of our listed companies (if) and its performance's inter-related decline should also attributed to the more intense economy-wide competition in China? How firms' intense competition in product market is to transfer to its securities market and lead to its risk or frequent fluctuations in return? Whether there exists the efficiency affiliated or interactions between the two factors market, namely firms'product market and stock market? Based on the industrial organization, market structure, strategic management or the theory of creative destruction, and inspired by the latest research abroad, the theoretical model and empirical test of this paper systematically investigates the product market competition' "endogenous interaction effect" and "exogenous independent effect",Based on the basic sample of China's Shanghai and Shenzhen A shares of 2000-2010, and our listed company's product market competition's multi-dimensional measurement (PMC), the empirical results of the paper significantly support the theoretical expectations whatever in its total sample or its multiple sub-samples. The results of this study indicate that:at least over the past decade, the idiosyncratic risk level of listed companies'in China is also indeed showing a significant increasing trend. The paper argues that this finding is attributable to the more intense product market competition, the intense market competition among firms and the fragmented industry structure would be detrimental to the company's performance, and the more concentrated industry structure or firms' significant product market power (MP) can help to alleviate the low efficiency of the company's securities market (SME), that is, they can effectively weaken the idiosyncratic return volatility, lower its cost of capital and information asymmetry, and thus stabilize and enhance the company's overall performance. These results are not only consistent with the early classic literature and recent research findings, but also consistent with the characteristics of the new policy orientation in China. These findings obviously have important theoretical and practical value in the research or practice of our listed companies' decision-making path, as well as China's financial market development and industrial structure adjustment and other macro-policy reform and innovation.