Intra-industry momentum and product market competition around the world

Abstract

This paper examines the relationship between product market competition and intra-industry momentum returns. Based on 12,982 firm observations from 19 developed markets for the period of 1990–2010, I find that buying winners and selling losers in competitive industries generates significantly higher momentum profits than that in concentrated industries. The higher the intensity of product market competition, the larger are the intra-industry momentum returns. The results are robust to sub-samples (periods) of the U.S., non-U.S. countries, the G7 countries, 1990–2000, and 2001–2010. I further employ the nearness of a stock's price to the 52-week high to determine past winners and losers and find stronger results. I also compare intra-industry momentum returns with Jegadeesh and Titman (1993) individual stock momentum and Moskowitz and Grinblatt (1999) inter-industry momentum strategies. My results suggest that intra-industry momentum strategy outperforms the latter two strategies in most cases. The overall results are consistent with the notion that severe product market competition induces managers to improve financial performance.