What Causes the Concentration Discount? Evidence from Brazilian Stock Markets

44 Pages Posted: 1 Oct 2011

See all articles by Rogerio Mazali

Rogerio Mazali

Catholic University of Brasilia

Date Written: August 25, 2011

Abstract

We propose and perform an empirical experiment to isolate the two factors pointed by Hou and Robinson (2006) as potential causes of what we call the concentration discount. These two factors are: innovation risk; and distress risk triggered by the absence of barriers-to-entry. Brazilian law restricts bankruptcy prospects of State Controled Enterprises. This fact gives us a natural experiment that allows us to separate the two effects. Using data from Brazilian firms listed in BOVESPA, we find evidence of a concentration discount associated with larger barriers to entry. However, we find no evidence of the existence of concentration discount associated with lower innovation risk. Our findings, thus, support the Bainian Market Power hypothesis, but are inconsistent with the Schumpeterian Creative Destruction hypothesis. Our findings are robust to model specification and the use of matched sampling methods.

Keywords: concentration, competition, premium, oligopoly, product markets

JEL Classification: G32, L11

Suggested Citation

Mazali, Rogerio, What Causes the Concentration Discount? Evidence from Brazilian Stock Markets (August 25, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1928046 or http://dx.doi.org/10.2139/ssrn.1928046

Rogerio Mazali (Contact Author)

Catholic University of Brasilia ( email )

SGAN 916, Módulo B, Asa Norte
Brasília, DF 70790-160
Brazil
+55 61 3448-7192 (Phone)

HOME PAGE: http://www.ucb.br

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