What Causes the Concentration Discount? Evidence from Brazilian Stock Markets

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