Returns to Investors in Stocks in New Industries

Gerald P. Dwyer Jr. and Cora Barnhart
Working Paper 2008-21
September 2008

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We examine the returns to investors in publicly traded stock in new industries. We examine data from the United States on sellers of own-brand personal computers, airlines and airplane manufacturers, automobile manufacturers, railroads, and telegraphs. We find that a relatively small number of companies generate outstanding returns and many firms fail. Firms in new industries typically have high volatility of individual stocks' returns. Compared with indexes for the same period, expected returns of firms are higher for two industries, lower for one industry and roughly the same for two industries. Portfolios of firms in new industries generally have lower Sharpe ratios than the overall market.

JEL classification: G1, G12, N2, N21, N22

Key words: expected returns, options, lottery tickets, returns by industry

The authors thank Mardi Dungy, Mark Fisher, and Paula Tkac for numerous helpful comments. They also thank other members of a brown bag lunch at the Federal Reserve Bank of Atlanta for comments that substantially improved the paper. Ann Gillette, Scott Hein, Delroy Hunter, and Cesare Robotti provided helpful comments on earlier drafts. The authors also acknowledge helpful comments from participants at seminars at the Bank of Finland, the Cambridge Endowment for Research in Finance at Cambridge University, the City University Business School in London, EDHEC Business School, the University of Carlos III, and the University of Georgia. Pam Frisbee, Budina Naydenova, and Shalini Patel provided excellent research assistance, and Linda Mundy put everything together. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Gerald P. Dwyer Jr., Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, N.E., Atlanta, GA 30309,, 404-498-7095 (phone), 404-498-8810 (fax), or Cora Barnhart, Palm Beach Atlantic College, Rinker School of Business, 901 S. Flagler Drive, West Palm Beach, FL 33401,, 561-803-2484 (phone), 561-803-2467 (fax).

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.