ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Firm－level Competition Perceived by a Firm and its Implied Cost of Risk Premium

  • Seung-Yeon Lim Kookmin University

Asian Tax Journal Vol. 19 No. 2 (2018), pp. 231-255

Abstract

This study examines whether a firm－level competition perceived by a firm affects its implied risk premium. Prior literature based on an industry－level competition provides a mixed result of the effect of competition on a firm’s implied risk premium as well as it’s performance. While some studies report a negative effect of competition on a firm by showing that the firm’s profitability is low and volatile in the competitive environment, others provide an positive evidence that competition pressure enforces discipline on managers to reduce slack and increase firm’s operating efficiency. The results of an analysis using a new measure developed by Li et al.(2013) as a proxy for the firm－level competition indicate that, even after controlling for several determinants of risk premium and some properties of analysts’ forecasts, the implied risk premium has a significant negative relationship with firm－level competition and that this relationship was robust to inclusion of industry－level competition in the model and across a variety of growth groups. These results provide support for the view that competition pressure enforces discipline on managers to reduce slack and maximize profits.

Keywords

  • competition
  • risk premium
  • corporate governance
  • growth4)

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