Market share instability and stock price volatility during the industry life-cycle: the US automobile industry

Market share instability, during certain stages of the industry lifecycle, has become a stylized fact in the industrial organization literature. In th e finance literature, volatility in the form of excess volatility, i.e. the much larger volatility of stock prices than dividends (although stock pric es should in theory trace the present value of future dividends), has given rise to controversies regarding stock price determination (Campbell and Sh iller, 1988; Shiller, 1989). Recent evolutionary models, both theoretical a nd empirical, have lied the presence of market share instability to industr y specific variables, such as specific periods in the industry life-cycle a nd specific "technological regimes". The object of the paper is to explore whether there is a relationship between market share instability and stock price volatility and to what degree this relationship is connected to the c oncept of the industry life-cycle, and hence to industry specific factors. To do so, we explore the relationship in one particular industry, the US au tomobile industry. Since neither life cycle nor finance theories attack thi s problem directly, we use insights from both approaches to build hypothese s which guide the data analysis. The empirical results confirm many of thes e hypotheses, suggesting that the degree of excess volatility is indeed par tly affected by industry specific factors.