Competition and exposure of returns to the C-CAPM

This study aims to investigate the effect of product market competition on the exposure of firms’ returns to consumption fluctuations (C-CAPM beta).

The C-CAPM beta comes from a regression of a stock’s returns against consumption growth, with controls for the Fama–French three factors and momentum. The Herfindahl–Hirschman index of concentration measures competition, with other measures like deregulation and tariff reductions used for robustness tests. Industries are categorized using different SIC digits, with the NAICS measure used for robustness tests. The C-CAPM beta is regressed to competition, with appropriate control variables, to find its relationship.

Higher levels of competition reduces the C-CAPM beta. The results are consistently robust to different measures of product market competition and industry identification.

Product market competition influences the sensitivity of systematic risk, as measured by the C-CAPM beta, to consumption, such that higher levels of competition reduce systematic risk.

This research contributes to a literature that admittedly is still murky, as the relationship between competition and systematic risk is still unsettled. No study (to the authors’ knowledge) examines the effect of competition on firms’ exposure to consumption. This research adds to the literature on the role of competition in risk, specifically with respect to consumption.