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The diversification cost of large, concentrated equity stakes. How big is it? Is it justified?

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  • Ødegaard, Bernt Arne

Abstract

While the hypothesis that ownership concentration can affect the value of a company has seen a lot of empirical study, little light has been shed on a complementary problem, that these concentrated owners have a cost of their position due to an undiversified portfolio. Using a unique data set of the actual diversification of all Norwegian equity owners, we show that the largest owners of a corporation in fact have very undiversified equity portfolios, and that such owners have significant costs to their concentrated portfolios. At the level of risk of a benchmark portfolio, if they were to move from their present portfolio composition in risky assets to a well diversified portfolio, their returns would have increased by about 13 percentage points in annual terms. We ask whether this cost can be explained by estimated benefits of ownership concentration (private benefits), and show that extant estimates of private benefits are too low to offset our cost estimates.

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Bibliographic Info

Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 6 (2009)
Issue (Month): 2 (June)
Pages: 56-72

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Handle: RePEc:eee:finlet:v:6:y:2009:i:2:p:56-72

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Web page: http://www.elsevier.com/locate/frl

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Keywords: Portfolio diversification Large equity owners Costs and benefits of equity ownership concentration Private benefits;

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Cited by:
  1. Arugaslan, Onur & Cook, Douglas O. & Kieschnick, Robert, 2010. "On the decision to go public with dual class stock," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 170-181, April.
  2. Anaïs Hamelin, 2009. "Do small family businesses have a peculiar attitude toward growth? Evidence from French SMEs," Working Papers CEB 09-032.RS, ULB -- Universite Libre de Bruxelles.

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