Investigating the Relationship between Product Market's Competitive Structure and Stock Return

The purpose of this article is to investigate the impact of product market competition on the stock return of listed companies on the Tehran Stock Exchange. To achieve this aim, Herfindal-Hirshman index, Lerner index and modified Lerner index was considered as measures of competition. The data sample is restricted to 87 companies during 8 years recent period from 1381 to 1388. The results of hypothesis testing using panel data regression indicate that there is a negative relationship between Herfindal-Hirshman index and stock return of the examined companies even after controlling for potential confounding effects. However, this relationship is not significant. Furthermore, there is a significant negative relationship between Lerner index and stock return. The relationship between modified Lerner index and stock return is also significantly negative. Overall, our findings show that the more competition, the more is the stock return. This is consistent with creative destruction hypothesis and barriers-to-entry hypothesis indicating that the competitive industries would earn higher stock returns.