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In this paper, the author examines the relationship between industry concentration and the cross-section of stock returns in the London Stock Exchange between 1985 and 2010. Using Multifactor asset pricing theory, the author tests whether industry concentration is a new asset pricing factor in addition to conventional risk factors such as beta, firm size, book-to-market ratio, momentum, and leverage. The author finds that industry concentration is negatively related to the expected stock returns in all Fama and MacBeth cross-sectional regressions. In addition, the negative relationship between industry concentration and expected stock returns remain significantly negative after beta, size, book-to-market, momentum, and leverage are included, while beta is never significant.
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