Winston Wei Dou

Competition Network: Distress Spillovers and Predictable Industry Returns

Joint with Shane Johnson, Wei Wu

March 2022

We build a competition network of industries --- two industries are connected if they share at least one multi-industry firm that competes as a major player in both. Exploiting quasi-experiments induced by the local-natural-disaster occurrences, Lehman failure, and American-Jobs-Creation-Act passage, we find that firms hit by adverse (positive) distress shocks decrease (increase) profit margins, and in response, their ``untreated'' industry peers, driven by intensified (eased) competition, also cut (raise) profit margins and become more (less) distressed. Further, distress shocks and the resulting changes in competition intensity can propagate to other industries through common major players. Such cross-industry spillovers, with investors' learning frictions, rationalize industry return predictability through the competition-network links.