Industry concentration, earnings persistence, and stock prices

This paper investigates the association between industry concentration and stock returnon equity, persistence of returns and market to book value ratios of stocks in Australiabetween 1991 and 2003. During this period the market to book value ratios of firmsincreased steadily. Consistent with prior overseas studies, this study provides evidence ofa significant association between industry concentration and the persistence of returns onequity. This study extends earlier industry concentration studies by providing evidencethat for dominant firms in an industry group there is also a positive association betweenindustry dominance and persistence of returns. This is consistent with industryconcentration and firm dominance of industry being associated with a reduced rate ofmean reversion of firm returns.The paper finds a weak association between industry concentration and level of ROE, anassociation which strengthens when previous period's ROE is controlled for in theregression. The findings call for further research into earnings persistence using morerefined industry classification data.