Research On Influence Of The Product Market Competition On Stock Market

The product market and financial market have long been regarded as separate markets in the finance literature, and researches always neglect the influence of product competition on financial market. Generally speaking, firms compete in the product market and generate cash flow with uncertainty. The market power would have an influence on the uncertainty of the cash flow, the bigger of the market power, and the smaller of the uncertainty of the cash flow. Stock analysts forecast the cash flow of the listed companies in the stock market, and they convey the message to the investors by kinds of media. Based on their earnings expectations, the investors evaluate the price of the stock. As a result, product market competition would have an important impact on the stock market. This thesis investigates the relationship between product market competition and stock market from the perspective of product market competition, and we find product market competition is an important factor for the stock market. The thesis fills the gap of the existing literature and help to understand better the relationship between product market competition and stock market.China has gradually established the goal of socialist market economy since reforming and opening, and market economy becomes the fundamental means of the resources allocation. At the same time, the extent of marketalization increases gradually. In the process of state-owned enterprises reform, state-owned enterprises quitted the competitive industries, and private enterprises entered into the new industries and areas and the ratio of private economy increases gradually. Import tariff decreases much and lots of commodities entered into domestic market since China’s entering into WTO in2002. Foreign industry capital entered into domestic market in the form of FDI, which further intensify the product market competition. There is, however, some administrative monopoly in some industries, where private enterprises face high entry barriers and market competition is much weaker.At the same time, China’s stock market has experienced extreme reformation and development since1990s, and the total market value of the domestic stock market has ranked the second place in the world by2010. Shareholding division reformation fundamentally solved the interest conflicts of the non-tradable shareholders and tradable shareholders, which significantly improved the stock liquidity. Growth Enterprise Market, small and medium sized enterprises board and main board market constitute the capital market system. However, there are still some illegal activities in the domestic stock market, such as insider trading, illegal information disclosure and rat trading.On the one hand, the extent of marketalization increases gradually and the product market competition intensifies more and more. On the other hand, China’s stock market also obtains tremendous growth. This thesis investigates the relationship between product market competition and stock market in the background of China’s economy transition. This thesis measures the product market competition and firms’market power using both market concentration and the Lerner index. On the one hand, market concentration and the Lerner index reflect the extent of product market competition, the fiercer of the market competition, the lower of the market concentration and the smaller of the Lerner index, and vice verse. On the other hand, the market concentration and the Lerner index reflect the market power of the firms, the higher of the concentration and the bigger of the Lerner index, the bigger of the market power, and vice verse. Product market competition and firms’Lerner index are two sides of one coin, which reflects the competition structure of the product market.This thesis includes seven chapters and the structure is as following.Chapter one is introduction, which brings forward the background and the question, then points out the contribution of the thesis theoretically and empirically.Chapter two is literature review. We review and discuss the related literature from four different dimensions, stock return, idiosyncratic volatility, stock analyst forecasting and stock price informativeness.Chapter three investigates the relationship between product market competition and stock return. We find that the more concentrated of the industries and the bigger of the Lerner index, the lower of the stock return, after controlling for other factors affecting stock return. The coefficients of the market concentration and the Lerner index are still negative after including the ownership and state-own share ratio of listed companies. The results show that our findings are not due to the ownership of the listed companies. Robust checks show that the finding is valid for both the pre stock reform sample and post stock reform sample, and our results are robust to the market concentration measure.Chapter four investigates the relationship between product market competition and idiosyncratic volatility. The stock price equals the sum of the discounted expectation of the cash flow by the dividend discount model. We find that the higher of the market concentration and the bigger of the firms’Lerner index, the lower of the idiosyncratic volatility. Considering that the new IPOs and stock delists would affect the idiosyncratic volatility, we keep only stocks that trade through1998and2007, and the results is still valid. Robust checks show that our findings are robust to the choice of the method of model regression, the idiosyncratic volatility measure and market concentration measure. Because idiosyncratic volatility measures the idiosyncratic risk of stock, the idiosyncratic risk would have an impact on the stock return in incomplete market. As a result, the results of this chapter provide empirical basis for chapter3.Chapter five investigate the relationship between product market competition and stock analyst forecasting. The fiercer of the product market competition, the more difficult of the earning forecasting. The difficulty of the earning forecasting would influence the performance of the analyst forecasting in turn. We find that the higher of the concentration ratio and the bigger of the Lerner index, the more accurate of the earning forecasting and the smaller of optimistic bias. Robust checks further support our findings. At the same time, analysts’forecasts represent the investors’earning expectations; the results of this chapter provide channel and mechanism for chapter six.Chapter six investigates the relationship between product market competition and stock price informativeness. We calculate the cumulative abnormal return (CAR) related earning announcement using event study method, and we measure the price informativeness using the CAR. The bigger of the CAR, the smaller of information content of the stock price, and vice verse. We find that the higher of the concentration ratio of the industries and the bigger of the Lerner index, the lower of the CAR and the stronger of the price informativeness. The coefficient of the market concentration is insignificant after considering the detrended turnover and sample cluster. Robust checks further support our findings. In domestic stock market, the dividend plan is announced simultaneously with the earning announcements of semi-annual report and annual report. The dividend information of the plan would generate noise entering into stock price. There are lots of listed companies which do not hand out dividend to the investor. As a result, it provides ideal experiment for us to test the influence of dividend information on stock price. We divide the sample into two parts, stocks without dividend and stocks with dividend. We find that the coefficients of the market concentration and the Lerner index are both significant in the sample without dividend, and the coefficients of these two variables are insignificant in the sample without dividend. It shows that dividend information as noise indeed influences the stock price, which makes the coefficients of the market concentration and the Lerner index insignificant.Chapter seven concludes the whole thesis and demonstrates the deficiencies and flaws of the thesis. At the same time, we also point out the direction of the further study.The research relating product market competition and stock market is just beginning. Relative to the existing literatures, the innovation and contribution of this thesis is as following. Firstly, the literatures mainly focus on a special point. We investigate the relationship between product market competition and stock market from four different perspectives and try to find the potential channels. Secondly, we use both market concentration and Lerner index to measure the product market competition and firms’market power. Last but not least, we apply the firm level data from National Bureau of Statistics (NBS) to calculate the market concentration, which comprises of all state owned firms and non state owned firms with operating income no less than five million. It can effectively alleviate the influence of measurement error.We don’t construct general equilibrium models to relate product market competition and stock market to study the relationship theoretically. We calculate the market concentration using firm level data from National Bureau of Statistics, which can measure the concentration ratio more accurate. The data, however, does not include firms of agriculture industry and service industry. As a result, we have to delete the stocks of agriculture industry and service industry when merging the stock data with market concentration data. It would decrease the sample and lose the efficiency of estimation. These are the deficiencies of the thesis.Product market competition has influence on stock market from many ways, and we study its influence on stock return, idiosyncratic volatility, analyst forecasting and stock price informativeness. Corporate governance, stock liquidity and cash holding all could be the topic of the further research.