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How are industry concentration and risk factors related? Evidence from Brazilian stock markets

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  • Rogério Mazali

Abstract

We isolate the two factors pointed out by previous literature as potential causes for the documented relation between returns and industry concentration: innovation risk (Creative Destruction Hypothesis, Dominant Replacement Effect Hypothesis) and distress risk (Market Power Hypothesis). Brazilian law allows us to isolate the two effects. Using data from Brazilian firms listed in BOVESPA, we estimate a regression model that uses State-Controlled Enterprises as a control group to separate the concentration/returns trade-off in two risk components. We find little evidence of the existence of a relation between industry concentration and stock returns. However, we do find evidence of the existence of innovation and market power effects. Oligopolistic firms are responsible for most of the investment ininnovation. Our findings do not support the Creative Destruction Hypothesis. They support the Dominant Replacement Effect Hypothesis.

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  • Rogério Mazali, 2017. "How are industry concentration and risk factors related? Evidence from Brazilian stock markets," New Zealand Economic Papers, Taylor & Francis Journals, vol. 51(2), pages 148-176, May.
    • Handle: RePEc:taf:nzecpp:v:51:y:2017:i:2:p:148-176
    DOI: 10.1080/00779954.2017.1314317
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