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The effects of institutional ownership on the value and risk of diversified firms

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  • Jafarinejad, Mohammad
  • Jory, Surendranath R.
  • Ngo, Thanh N.

Abstract

We study the link between institutional ownership and firms' diversification strategy, value and risk. Our sample includes US-listed firms with segment data from 1998 to 2012. We find that not all kinds of diversification are value-destroying; unlike industrially-diversified firms, global single-segment firms are trading at a premium relative to their imputed value. The presence of institutional investors and the stability of their shareholdings positively influence the likelihood that a firm is diversified. The proportion (volatility) of institutional ownership is higher (lower) among diversified firms compared to domestic single-segment firms. More importantly, the higher the proportions of institutional shareholdings, the higher the excess value of the diversified firm and the lower the firm idiosyncratic risk. Institutional ownership volatility, on the other hand, is inversely related to a firm excess value but positively related to its idiosyncratic risk. Thus, the presence of long-term stable institutional investors enhances the value of diversified firms. Our findings remain robust to various model specifications and estimation techniques.

Suggested Citation

  • Jafarinejad, Mohammad & Jory, Surendranath R. & Ngo, Thanh N., 2015. "The effects of institutional ownership on the value and risk of diversified firms," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 207-219.
    • Handle: RePEc:eee:finana:v:40:y:2015:i:c:p:207-219
    DOI: 10.1016/j.irfa.2015.05.019
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    More about this item

    Keywords

    Institutional ownership; Corporate diversification; Diversification discount; Excess value;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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