TableX reports the difference in abnormal returns (alphas) between high and low concentration portfolios for all our proxies for concentration. So we could monitor the The pattern of the change in the number of firms and HHI is slightly weaker but similar to the one presented here. When you break something in half, the surfaces where those two pieces were connected are now new surface areas for the two objects. The Economic Implications of the Increase in Concentration Levels, 4. As it turns out, though, you really don't want to produce and activate all of those enzymes at the same time, or in the same cell. We find that over the last two decades the HerfindahlHirschman index (HHI) has systematically increased in more than 75% of US industries, and the average increase in concentration levels has reached 90%. For a reaction such as aA products, the rate law generally has the form rate = k[A], where k is a proportionality constant called the rate constant and n is the order of the reaction with respect to A. Alternatively, significant barriers to entry, including economies of scale, technological barriers, and large capital requirements, should cause firms operating in increasingly concentrated industries to exercise market power and generate larger abnormal profits (e.g., Bain, 1951, 1956). We then aggregate the measure across industries by calculating a value-weighted average HHI, in which the weights are determined by the level of industry sales. Asset Utilization is defined as total sales scaled by total assets. To aggregate the index across industries, we use a sales-weighted approach, where the weights are determined by the level of industry sales: 1j=1TSalejj=1TSalejHHIj, (where Salej is the total sales in industry j, and T is the total number of industries). An index calculated based on combination of two concentration measures. (, Kogan L., Papanikolaou D., Seru A., Stoffman N. (, Lopez R. A., Azzam A. M., Lirn-Espaa C. (, Oxford University Press is a department of the University of Oxford. Book-to-market ratio calculated as book equity divided by market equity. TableX panels BD report monthly alphas estimated over three different subperiods. Standard errors (reported in parentheses) are clustered at the firm level. Industry is defined using a firms three-digit NAICS code. Panel B shows the number of publicly traded firms in CRSP database since the beginning of its coverage in 1925. If you remove the energy, you favour the product forming reaction. concentration. The catalyst is another factor that can affect the rate of a reaction. For example, we use the share of the top four firms reported in 1997 for the observations in years 1997, 1998, 1999, 2000, and 2001. We gather data from the Securities Data Companys (SDC) M&A database. hydrochloric acid again. Has the Obama Justice Department reinvigorated antitrust enforcement? If markets are contestable, that is, few barriers to entry, then even firms operating in highly concentrated industries should behave as if they had many competitors (Baumol, 1982). Assets is the book value of total assets. See Section 4 for dataset description and full specification, and Appendix A for details of variable construction. However, the possibility exists that industry consolidation can lead to improvements in operational efficiencies, thereby increasing profitability. So let's say on the left, The pattern is economically large, robust to different measures of product market concentration and different industry classifications, and prevalent across the majority of US industries. Reaction rates are affected primarily by concentrations, as described by the reaction's rate law, and temperature, as described by the Arrhenius equation. To account for time-varying industry characteristics in an alternative set of regression results, we follow Gutirrez and Philippon, (2017) and augment our estimation with additional controls (see Appendix A for definitions). All rights reserved. We obtain information on total sales of majority-owned foreign affiliates by industry for the period of 200213 from the Bureau of Economic Analysis (BEA), and include the total sales figures in the USA (variable Intersales), converted into logs, in the main regressions of profitability and M&A returns. In particular, we examine whether the higher ROA and market reaction to merger announcements are also associated with abnormal stock returns. 576-613 Terms in this set (271) reaction rate (in terms of products and reactants) -how fast a given amount of reactants are converted to products. Next, we go beyond sales-based measures to evaluate the relative importance of large US firms through labor market dynamics. These findings demonstrate that firms in concentrated industries are becoming more profitable predominantly through higher profit margins, rather than via greater efficiency. We also find the relation between concentration and profitability, as well as M&A returns, remains significant when we use text-based industry definitions (Hoberg and Phillips, 2010, 2016), which assign a unique set of peers to every firm. Second, we examine whether the positive association we uncovered between concentration and profit margins is also reflected in stock prices. Asset Utilization is defined as total sales scaled by total assets. We also conduct a Wald test of a structural break at an unknown break date in the time-series of the aggregate HHI and find a statistically significant structural break in the trend coefficient around the year 2000.17 Separating the sample into alternative subperiods does not qualitatively affect any of our main results. Le Chtelier's principle: Changing concentration - Khan Academy The results are presented in TableIX. We use 1997 as our starting period because 1996 and 1997 are the years in which, during our sample period, the HHI was at its lowest level, and the number of public firms in our sample peaked.6 For every industry we use all public firms data from the merged CRSP-Compustat universe and calculate a percentage change in HHI from its 1997 level to its 2014 level. This analysis also reveals that total factor productivity (TFP) is uncorrelated with industry concentration levels, indicating that if the efficiency channel is at work, it would be observable through factors unrelated to capital, labor, or materials. ROA is the operating income before depreciation scaled by the book value of assets. Including microcaps in our regressions does not affect our main results. We also show that the higher profit margins associated with an increase in concentration are reflected in higher returns to shareholders. Past empirical evidence regarding the association between market power and abnormal returns has been mixed. concentration of a reactant. In Figure1 panel B we use the number of public firms as another proxy for concentration. The glow from a glow stick comes from a chemical reaction. We subtract depreciation from operating income to take into account the cost of physical capital (Hall and Jorgenson, 1967). Our paper makes three important contributions to understanding product markets in the USA. Import is equal to the total value of import activity at the NAICS three-digit industry level. So instead of using one If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. For a product concentration application, one would select a membrane with a rating to ensure retention of the target material. To this end, we examine whether the empirical relation between profitability and change in industry concentration levels stems from higher profit margins, higher operational efficiency, or both. Questions Tips & Thanks Want to join the conversation? Although a greater concentration of product markets can improve the quality, or increase the variety, of products offered, whether those changes are sufficient to compensate customers for firms higher profit margins remains an open question. 13.3 Shifting Equilibria: Le Chtelier's Principle - OpenStax In thermodynamics, spontaneous does not mean instantaneous or even fast. Symbols a, b, and c indicate significance at 1%, 5%, and 10%, respectively. the process of growth in the number of large-scale enterprises and the concentration in these enterprises of an increasing share of the society's means of production, work force, and output. Overall, the results consistently point to an increase in product market concentration over the past two decades. We then use the industries included in one of the two portfolios (based on the change in concentration levels) to calculate equally and value-weighted returns at a portfolio level. In this case, the measures of concentration based on only public firms would seem to point to an increase in concentration, despite the actual concentration having changed only slightly. In aggregate, since 1997 the series has surged almost 70%. 13.12: Effect of Adding a Reactant or Product CAR is the cumulative abnormal return of the combined firm (acquirer plus target) over a 3-day event window [1, 1] around the merger announcement (see Equation (2)). While the positive alphas during the period 201114 are robust to a multitude of benchmark portfolios, we recognize that using the evidence based on Compustat measures of concentration might not rule out certain alternative explanations for this set of results. Bio Flashcards | Quizlet Therefore, this subsection ensures the robustness of our profitability results to including information on private firms in the construction of profit margins and return on capital. Figure2 panel B reports the changes in concentration measures using this alternative census-based measure of the HHI during the period 19972012 (2012 being the most recent year for which census data are available). Gustavo Grullon and others, Are US Industries Becoming More Concentrated?, Review of Finance, Volume 23, Issue 4, July 2019, Pages 697743, https://doi.org/10.1093/rof/rfz007. TableI panel B reports the results from this analysis. increasing pressure increases reaction rate. -When a stress is applied to a system at equilibrium, the system reacts to minimize the effect of the stress. Share repurchases and firm performance: new evidence on the agency costs of free cash flow, Customer-base concentration: implications for firm performance and capital markets, Intangible capital and the investment-q relation, The evolution of competition in U.S. manufacturing, The influence of the financial revolution on the nature of firms, Intra-industry profitability differences in U.S. manufacturing 19531983, Causes of increased competition in the U.S. economy, 19391980, The Author(s) 2019. The aggregate Lerner Index is defined as the aggregate operating income after depreciation scaled by aggregate sales, while the aggregate Asset Utilization is defined as aggregate sales scaled by the aggregate book value of assets. Although a formal investigation of the driving forces behind the increase in concentration is beyond the scope of this study, we offer two possible explanations for the trend in product market consolidation and the associated increase in profits. So far, we have used industry measures to capture the overall product market environment. If industry concentration impacts firms prospects, then the market should react more positively to announcements of transactions that further erode product market competition. The first HHI uses Compustat data, which contain information on US public firms. But, there are noteworthy limitations to this type . Figure2 panel C shows the distribution of percentage changes in the share of the top four firms in each industry between 1997 and 2012. More recently, Autor et al. Effect of Feed Concentration. As such, the value of these goods and services increases,. Overall, these results strengthen the claim that the higher profits earned by firms in increasingly concentrated industries result from markups, and not from the use of more capital or from better utilization of the given firms assets. To increase the yield of product for the equilibrium Ni(s) + 4CO(g) arrow Ni(CO)4(g) + heat: a. add a catalyst b. decrease CO c. decrease Ni d. decrease the temperature e. increase the temperature Since most of the increase in industry concentration levels occurs in the latter part of our sample, we test for change in the empirical relation between profitability and concentration levels over that time period. In addition to including private firms, another advantage of the census measure is its superior ability to account for the activities of conglomerates. We first control for import penetration, which is one of the most common measures of foreign competition (e.g., Katics and Petersen, 1994; Borjas and Ramey, 1995; Cuat and Guadalupe, 2009; Irvine and Pontiff, 2009; Autor, Dorn, and Hanson, 2013; Acemoglu et al., 2016). One factor is the The effect of rising import competition on market power: a panel study of U.S. manufacturing. TableIX panel B further shows that if we use CensusTop8, all our findings remain essentially the same. The data are obtained from BLS, and are available for each of the following sectors: Agriculture; Forestry and Fishing; Mining; Construction; Manufacturing; Transportation, Communication, and Public Utilities; Wholesale Trade; Retail Trade; Finance, Insurance, and Real Estate; and Services. The relationship is also economically significant. For example, the momentum strategy generated a negative alpha over the same time period. This figure demonstrates that while the aggregate Lerner Index experienced a positive shift in the early 2000s, aggregate Asset Utilization has declined over time. The annual rate of increase in atmospheric carbon dioxide over the past 60 years is about 100 times faster than previous natural increases, such as those . The regression results show that the market reaction around M&A announcements is stronger for related mergers occurring in highly concentrated industries.20 Consistent with our profitability results, we find that this effect is much stronger during the post-2000 period. The coefficients on the number of firms and the concentration index are also close in magnitude to their values in the original specification, tabulated in TableII panel C. The coefficients of log(1+Import) and log(1+Intersales) are in general mixed, and have a positive sign when significant. We perform a similar exercise by replacing the change in concentration with the percentage change in the number of public firms and find that the correlation coefficient is close to zero and statistically insignificant. PDF K and E Practice 2016 - Pleasantville High School Finally, we estimate the regressions of profitability and efficiency as a function of the share of top four (eight) largest firms.25 All specifications include NAICS six-digit and year-fixed effects, as well as clustering at NAICS six-digit level. this flask on the left. The inclusion of firm-fixed effects addresses several alternative explanations, in addition to several potential endogeneity concerns. Standard errors (reported in parentheses) are clustered at the industry level. Lerner Index is the operating income before depreciation minus depreciation, all scaled by total sales. This time, when we add In a simplified explanation a catalyst works by reducing this activation energy barrier. Alternatively, some analysts argue that given the changing nature of US industries, the consolidation of firms within an industry may increase operational efficiency. In terms of economic significance, the coefficient of Concentration Index estimated over this period indicates that a change in concentration from the 25th to the 75th percentile leads to an increase in ROA of about 32.3% relative to its median. However, the robustness of our main results in Sections 3 and 4 to various measures of concentration accounting for private firms, foreign firms, as well as different definitions of industries, remains a strong indicator that these are not the driving factors behind our findings. In addition, this trend indicates that greater concentration in product markets, as measured by concentration in sales, correlates with increased concentration in labor markets. the reaction in general, is because increase in temperature means the molecules are moving faster. We control for deal characteristics by including the market values and book-to-market ratios of the target and acquiring firms, and dummies for pure cash transactions and pure stock transactions. The process is characterized by a significant loss of entropy. The hydrogen peroxide is For most reactions increasing the concentration of the reactants will increase the rate of the reaction. Third, we find that firms in more concentrated industries experience significant abnormal stock returns, which indicates that a considerable portion of the gains accrues to shareholders. Since the late 1990s, over 75% of US industries have experienced an increase in concentration levels. During recent administrations, antitrust enforcement has weakened. We also exclude financials and utilities from our sample because these firms face more regulatory uncertainty during the merger process. Alternatively, if barriers to entry, including economies of scale, technological barriers, and large capital requirements, become more salient, then firms operating in increasingly concentrated industries may generate larger profits by exercising market power, and/or becoming more efficient. rate of this reaction by observing the amount Although some of our profitability tests are limited to publicly traded firms, we have performed multiple tests to ensure that our findings are robust to the inclusion of private firms. small pieces of zinc. K_m K m is also a measure of an enzyme's . Direct link to christian's post What is the rationale beh, Posted a year ago. This result is consistent with the findings by Doidge, Karolyi, and Stulz (2017) who estimate the listing gap of the US publicly traded firms and find that the structural break, where the listing gap started to arise, occurred in 20002001. To control for international competition in the form of foreign operations on US territory, we also include the scope of operations by foreign multinationals. 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This appendix defines each of the variables used throughout the paper. While our findings for ROA and the Lerner Index remain economically and statistically significant, the positive correlation between concentration levels and Asset Utilization disappears. Substrate Concentration - an overview | ScienceDirect Topics Baumol (1982, p.2) argues that in the limiting case of perfect contestability, oligopolistic structure and behavior are freed entirely from their previous dependence on the conjectural variations of incumbents and, instead, these are generally determined uniquely and, in a manner that is tractable analytically, by the pressures of potential competition.. The sample consists of M&A transactions over the period 19802014. are colliding with each other with greater frequency Created by Yuki Jung. As we will demonstrate, this increase in concentration is widespread across industries. TableI panel A reports the coefficients of Equation (1) estimated over the period 19722014. Winsorized at 1% and 99% of the distribution. Given the change in the nature of product markets over the past two decades, we reexamine this important question by analyzing the relation between profitability and changes in industry concentration in a panel-data setting, while controlling for other factors that can influence firms profitability levels. Limited antitrust enforcement can incentivize firms to engage in M&A activity, which further reduces competition. If a firms operations span multiple sectors, industry boundaries become blurred, and standard classifications such as NAICS or SIC do not identify the true set of product market competitors. We also investigate the possibility that the documented dominance of large firms over the past two decades is driven by a higher prevalence of multisegment firms. The sample covers the period 200114. Does corporate governance matter in competitive industries? hydrochloric acid increases, there are more acid particles to collide with the piece of zinc. Changes in concentration levels are calculated from year t-2 to year t-1. The liquid passing to the permeate side results in a proportionate increase in the product concentration on the feed side of the membrane. Panel A depicts the aggregate ROA for all the firms that appear in the CRSP-Compustat merged dataset (see Sections 2.1 and 3.1 for details) over the period 19722014. Importantly, we also consider the possibility that accounting profits do not fully capture firms payments for the use of capital. TableX panel A shows that most alphas are not statistically different from zero over the period 19722014. To test this possibility, we examine the returns of our investment strategy during the global financial crisis of 200708, which is one of the largest negative systematic shocks in recent history. We control for deal characteristics by including the market values and book-to-market ratios of the target and acquiring firms, and dummies for pure cash transactions and pure stock transactions. This phenomenon is summarized by Le Chtelier's principle: if an equilibrium system is stressed, the system will experience a shift in response to the stress that re-establishes equilibrium. The economic significance of the profit-margin impact is in fact considerably greater than the efficiency effect. While we find that the relative importance of public firms has not declined despite the decrease in the number of public firms (see Figure O-A.2 in the Online Appendix), our analysis might neglect a relevant dimension by investigating only publicly traded firms. Since census-based measures are updated only once in 5years, the declining relevance of the concentration indicators does not allow for a proper rebalancing of portfolios on an annual basis. increase the rate of reaction without affecting the yield. We use the total value of import activity at the NAICS three-digit industry level (Import), obtained from the US Census Bureau, as a proxy for international competition.21. The substrate concentration that gives you a rate that is halfway to V_ {max} V max is called the K_m K m, and is a useful measure of how quickly reaction rate increases with substrate concentration. 2. adding more heat to the system. Standard errors (reported in parentheses) are clustered at the firm level. These results reinforce the conclusion that higher profits in concentrated markets result from the presence of markups; higher profits do not result from either increased reliance on capital or improvements in efficiency. The value of n is not related to the reaction stoichiometry and must be determined by experiment. The market value of equity of the target firm, as of the most recent fiscal year-end prior to the merger announcement date. Our papers findings are relevant to both several strands of the academic literature and to the pragmatic interests of policymakers.

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