Market Structure and Firm Level Returns: The Indian Evidence

In addition to the standard risk factors suggested by asset pricing models, the extant literature shows mixed evidence of the impact of market structure on firm-level returns. Using data for 940 Indian firms listed on the Bombay Stock Exchange across 65 industries between FY 2010–11 to FY2018-19 and Lowess smoothing followed by a robust regression model with time fixed and industry effects, we find that firms in more concentrated industries earn lower returns, after controlling for the well-known determinants of asset prices. The relationship is stronger for firms that engage in non-price competition. Further, the explanatory power is better for industries with higher levels of concentration. Our study also provides an explanation on why firms operating in less concentrated environments are able to achieve high returns in the Indian context and provides important implications for both investors and the policymakers. Thus, the study is a novel attempt to examine the impact of not just the intensity of competition on firm level returns but also the type of competition in the case of a developing country, i.e. India.