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The Limitations of Industry Concentration Measures Constructed with Compustat Data: Implications for Finance Research

The Limitations of Industry Concentration Measures Constructed with Compustat Data: Implications... Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies for actual industry concentration. These measures have correlations of only 13% with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more-concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat-based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat-based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat-based industry concentration measures may lead to incorrect conclusions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

The Limitations of Industry Concentration Measures Constructed with Compustat Data: Implications for Finance Research

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Publisher
Oxford University Press
Copyright
© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.
Subject
Article
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/hhn103
Publisher site
See Article on Publisher Site

Abstract

Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies for actual industry concentration. These measures have correlations of only 13% with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more-concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat-based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat-based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat-based industry concentration measures may lead to incorrect conclusions.

Journal

The Review of Financial StudiesOxford University Press

Published: Oct 23, 2009

Keywords: JEL Classification G10 G30 L10

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