The limitations of industry concentration measures constructed with compustat data: Implications for finance research

Ashiq Ali, Sandy Klasa, Eric Yeung

Research output: Contribution to journalArticle

145 Scopus citations

Abstract

Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies for actual industry concentration. These measures have correlations of only 13 with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more-concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat-based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat-based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat-based industry concentration measures may lead to incorrect conclusions.

Original languageEnglish (US)
Pages (from-to)3839-3871
Number of pages33
JournalReview of Financial Studies
Volume22
Issue number10
DOIs
StatePublished - Oct 1 2009

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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