Saleh (2007) employed the Fama and French (1993) three-factor model to investigate the ability of earnings-to-price (E/P), amongst other measures, to explain the cross-sectional stock returns over the period 1980-2000. Inconsistent with previous research, Saleh concluded that the loading of SMB and HML factors is not significant and, thus, he tried to explain these findings by using a multi-factor model. This paper aims to expand Saleh's (2007) work and thus seeks to explore the earnings-to-price (E/P) performance by decomposing the E/P effect into two components; financial effect and operational effect. The results confirm that SMB and HML factors captured some variation in stock returns that is not captured by the market return.
This paper aims to extend the paper by Saleh and Bitar (2009) by addressing whether variation in stock returns can be explained by differences in industry concentration. The paper concludes that firms operate in highly concentrated industries earn lower returns and less risk than those operate in highly competitive industries. Furthermore, the paper provides evidence to suggest that investors in Amman Stock Exchange cannot benefit from a trading strategy based on industry structure. Keywords: Book-to-market effect, Size-effect, Industry Effect, Three-factor model JEL classification: G15 1. Introduction Porter (1980) provided a framework for classifying and analyzing industry structure. Porter's five forces framework views the profitability of an industry (measured by its rate of return) as determined by five sources of competitive pressure. These are: competition from substitutes, competition from entrants, competition from rivals, bargaining power of suppliers and bargaining power of buyers. Recent research by Hou and Robinson (2006) tests the link between stock prices and market structure. The authors found that firms in highly concentrated industries earn lower return than those in highly competitive industries. They argued that "If barriers to entry in product markets insulate some firms from aggregate demand stocks, while exposing others, then we would expect distress risk to vary with market structure. This predicts that industries with high barriers to entry are associated with lower equilibrium stock returns. Thus, distress is another way that market structure can impact stock returns". Therefore, Hou and Robinson (2006) relied on the structure-conduct-performance approach in industrial organization to suggest that there are barriers to entry that restrict new firms from entering highly concentrated industries, thus, firms operate in these industries are able to exercise their power and earn abnormal returns which in turn lowers distress risk and returns. This paper seeks to investigate how industry structure (concentration) contributes in explaining the variation in stock returns. Further, it aims to test the relationship between industry concentration and distress risk. The main findings of the paper are: (1) firms operate in highly concentrated industries earn lower returns than those operating in highly competitive industries; (2) firms operate in highly concentrated industries face lower distress risk than those operating in highly competitive industries. A major implication of this paper is that investors in Amman Stock Exchange can not benefit from an investment strategy of short and long positions based on the industry concentration indicators. The remainder of the paper is organized as follows: Section 2 discusses the research hypothesis, Section 3 describes the empirical design and data, Section 4 presents the results and finally section 5 concludes. Research HypothesesTheories of strategy addressed the question why firms within and between industries differ in their performance. One ...
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