Does industry structure impact systematic risk?: A study of the interaction between product markets and capital markets within Swedish industries

Abstract: Backed by industrial organization theory, it is believed that firms with high individual market shares and firms operating in industries where output is concentrated to a few sellers and entry barriers are high can to some extent insulate their operations from general market risk. If stocks of such powerful firms involve less systematic risk and if assets are priced rationally in the capital market, these stocks should generate lower average returns. Using a sample of 80 Swedish firms listed on the OMX Nordic Exchange Stockholm classified into 35 different industries, we perform cross-sectional regressions to test if two indicators of industry structure, individual market share and industry seller concentration, are related to market risk as measured by beta. Further cross-sectional regressions are applied to test if these industry structure variables can proxy directly for systematic risk and therefore explain average stock returns. Two sample periods are used in this study; 2005-2009 and 2000-2009. It is found that individual market share and measures of seller concentration within an industry are negatively related to beta during the extended sample period 2000-2009. When investigating if industry structure variables can proxy directly for systematic risk and therefore explain stock returns we find no significant results for neither of the sample periods.