Competitive advantage and firm, industry, and country effects: An asset pricing perspective

We examine the relation between competitive advantage, its underlying drivers, and abnormal stock returns. We use a comprehensive global dataset covering 22 years. To measure competitive advantage, we use the cash flow return-on-investment (CFROI®) metric, which allows for consistent comparisons across industries, countries, and periods. We find a positive relation between competitive advantage and stock returns after controlling for common risk factors. Industry-based advantages are more important than resource-based advantages in explaining abnormal stock returns in developed markets. This result contrasts with most studies in strategic management, which mostly base their analysis on accounting-based profitability metrics. Country effects play a minor role.