1 Stock Return Dependence and Product Market Linkages Hossein Asgharian and Lu Liu * May, 2017 Abstract We study the implications of interfirm product market linkages for dependence among the daily stock returns of US publicly traded firms using a spatial econometric regression. Firms’ stock returns are affected by those of their rivals, major customers (i.e., those that represent 10% or more of the firms’ revenue), potential customers, and potential suppliers. All the effects are the strongest contemporaneously and diminish rapidly thereafter. Furthermore, the effects of rivals and major customers change with various characteristics related to the product market network. We document both a contagion effect and a competitive effect among rival firms. Positive (negative) dependence on the returns of rivals implies that the contagion (competitive) effect dominates. The competitive effect is found to dominate the contagion effect in highly concentrated industries, while the contagion effect becomes stronger in industries with higher product-market fluidity. Major customers’ effect is larger for firms that depend on their major customer(s) for a larger portion of sales and whose products are similar to those of other firms. This suggests that a concentrated customer base and weak product uniqueness may lower firms’ bargaining power and increase the sensitivity of their stock returns to those of large customers. Furthermore, we show that a firm’s stock return is more sensitive to linked firms’ negative return shocks than to their positive return shocks. Keywords: network, return comovement, competition and contagion effects, supply chain * Hossein Asgharian is at the Department of Economics and the Knut Wicksell Centre for Financial Studies, Lund University. Email: Hossein.Asgharian@nek.lu.se. Lu Liu is at Stockholm Business School, Stockholm University and the Knut Wicksell Centre for Financial Studies, Lund University. Email: Lu.Liu@sbs.su.se.