Are Competitors Advantageous or Disadvantageous in Consolidated versus Fragmented Industries (2004)

ABSTRACT We contend that competitors may be mutually disadvantageous in fragmented industries. Consequently, we expect that announcements of firm distress will be associated with positive implications for non-distressed competitors in fragmented industries. Alternatively we speculate that, in consolidated industries, rivals may be advantageous because they may offer net mutual benefits to each other. Thus, we predict that the announcement of distress by a firm in a consolidated industry will be received as negative news by its rivals since the contribution of that firm to the industry may cease. We utilize the event-study methodology to empirically test our hypotheses. INTRODUCTION While some senior executives may view the existence of rivals as advantageous, others tend to perceive competitor firms as detrimental to the interests of their own enterprises. We contend that whether competitors are advantageous or detrimental may be situational. Our conjecture is that in fragmented industries rivals may ordinarily be a threat; whereas, in consolidated industries they may be beneficial. That is because in fragmented industries competitors tend to be confrontational but in many consolidated industries enterprises can be non-confrontational and mutually advantageous in their rivalry. Whether the presence of rivals is advantageous or disadvantageous to a firm may be related to a variety of theories across a number of disciplines. We discuss the implications of these theories in the context of two settings - fragmented versus consolidated industry settings. For reasons that we will subsequently provide, our premise is that in fragmented industries competing enterprises may be reciprocally detrimental. In consolidated industries, however, we presume that rivals can be mutually beneficial. Yet whether firms in distinct industries offer net mutual advantages or disadvantages to each other remains an empirical question. If a firm is a threat to its rivals, its distress should be good news for these rival firms. Alternatively, if the firm can make a positive contribution to the industry, then its potential demise should be seen as an unfavorable event. The focus of our research is on exploring whether market values of firms respond negatively or positively to announcements of distress by a competitor, contingent on their industry affiliation. More specifically, we examine how announcements of bankruptcy impact the equity values of non-bankrupt competitors in consolidated and fragmented industries. An event-study methodology, more completely described later in this study, is used to accomplish the empirical analysis. If an announcement of a firm's bankruptcy within an industry has adverse economic implications for its non-bankrupt competitors, then their stocks should suffer negative returns. Alternatively, if the announcement of a bankruptcy benefits rivals, their stocks should experience positive returns. We organize this study into several sections. In the following section we provide a literature review and present our hypotheses. We then present our empirical analysis, describing both the sample construction procedure and our application of the event-study methodology. Finally, we report our findings and offer a discussion of their interpretation. RELATED LITERATURE AND HYPOTHESES Traditionally, advocates of determinism have assigned to organizations limited discretion within their environments. For instance, industrial organization theorists have explained firm conduct and performance as reflections of the structure of industry environment (Bain, 1956; Mason, 1939). Conversely, in the past, proponents of strategic choice have credited organizations with significant proactivity within their environments (Andrews, 1971; Chandler, 1962). More recently, however, advocates of determinism as well as strategic choice have begun to move closer together. Strategic choice theorists have recognized that the external environment may play a critical role in a firm's quest for survival (Hambrick, 1983; Hrebiniak & Joyce 1985). …