956 CYNTHIA A MONTGOMERY AND BIRGER WERNERFELT When evaluating market share changes in the brewing industry the key question is whether or not the gains are the result of fundamental shifts in relative resource positions In particular, one must consider if the gains resulted from new resources being differentially available to firms(e.g, if one firm patented a new product or process, or secured a position in product or geographic space which could not be duplicated) These conditions do not appear to hold among brewing industry leaders during this period(1969-1979). Although technology in the industry changed substantially during this time and placed small brewers at a critical disadvantage, the advancements were well known and available to all major firms. Other changes during this period e g, the shift to aggressive advertising and product differentiation, were readily imitable among industry majors. Not surprisingly, Lynk(1984, p. 53)described the situation as one where competitive rivalry, on balance, worked to the advantage of the consumers The above factors suggest that industry leaders in this setting should not be able earn excess rents by"buying "market share. At a minimum one would expect that share would be priced fairly as argued by Rumelt and Wensley(1981)and Posner (1975) To measure changes in firm value, we use as a benchmark the capital asset pricing model(CAPM). Following CAPM, the equilibrium market returns for a given firm can be found as Rit-Ra=B,(Rm-R)+ ejr (1) where Rir is the return on the stock of firm j in period t, Ry is the return on risk free assets(i.e, T-bills)in period t, Rmt is the return on the market portfolio in period t, B, is the"systematic"(nondiversifiable )risk for firm j, and eir N(O, ai) The idea is now to estimate Rii-Ri=ar+B(Rmt-Rn+er, tET (2) over a study period T. Since CAPM assigns air an expected value of zero the estimated intercept in some sense reflects the average extent to which the firm has created or de- stroyed value This method, originally due to Jensen( 1969), has been the subject of both theoretical ind empirical criticism. On the theoretical side, Roll ( 1978), Admati and Ross (1985) and Connor and Korajczyk (1986 )have pointed to conceptual problems underlying CAPM. Empirically, problems may relate to two issues. First, certain measurement prob lems may produce an upward bias in returns for less frequently traded firms( blume and Stambaugh 1983; Scholes and Williams 1977). Second, one has to worry about various misspecifications of CAPM, including the small firm effect( Banz 1981)and various forms of parameter nonstationarity(Kon and Lau 1979). Nevertheless, perhaps for want of alternatives, the method is still widely used in finance to evaluate the performance of portfolios( Kon 1983) In our first test daily stock returns are used to estimate air for each year and each firm. These measures of value creation are then correlated with contemporaneous market share changes Since the theory attributes both value creation and market share changes to shocks in underlying resources, the assumption about timing is that it takes the stock market roughly the same amount of time(within a year)to recognize the changed re- sources as it takes the firm to translate them into market share gains. An additional assumption is that expectations over market share dynamics follow a random walk While this is the conventional and natural model of expectations, we do not know if the results would hold in the face of more complicated models of expectations formation Market share data were obtained from Keithahn(1978), and stock price data from the CrsP tapes( Anheuser-Busch, Philip Morris-Miller, Schlitz or from OTC hardcopy Pabst, Coors-from 1976, Heileman-from 1974). Except for Philip morris, these