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

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Author Info
Ødegaard, Bernt Arne

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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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File URL: http://www.sciencedirect.com/science/article/B7CPP-4VGF3WF-1/2/449de61fb4a769d6a40c7f1d8ed5c44d
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Publisher 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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Related research
Keywords: Portfolio diversification Large equity owners Costs and benefits of equity ownership concentration Private benefits;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December. [Downloadable!] (restricted)
  2. Admati, Anat R & Pfleiderer, Paul & Zechner, Josef, 1994. "Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1097-1130, December. [Downloadable!] (restricted)
    Other versions:
  3. Lease, Ronald C. & McConnell, John J. & Mikkelson, Wayne H., 1983. "The market value of control in publicly-traded corporations," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 439-471, April. [Downloadable!] (restricted)
  4. Mike Burkart & Samuel Lee, 2008. "One Share - One Vote: the Theory," Review of Finance, Oxford University Press for European Finance Association, vol. 12(1), pages 1-49. [Downloadable!] (restricted)
  5. Barclay, Michael J. & Holderness, Clifford G., 1989. "Private benefits from control of public corporations," Journal of Financial Economics, Elsevier, vol. 25(2), pages 371-395, December. [Downloadable!] (restricted)
  6. Ernst Maug, 1998. "Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?," Journal of Finance, American Finance Association, vol. 53(1), pages 65-98, 02. [Downloadable!] (restricted)
  7. Renée Adams & Daniel Ferreira, 2008. "One Share-One Vote: The Empirical Evidence," Review of Finance, Oxford University Press for European Finance Association, vol. 12(1), pages 51-91. [Downloadable!] (restricted)
  8. William N. Goetzmann & Alok Kumar, 2005. "Why Do Individual Investors Hold Under-Diversified Portfolios?," Yale School of Management Working Papers ysm454, Yale School of Management. [Downloadable!]
  9. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04. [Downloadable!] (restricted)
  10. Alexander Dyck & Luigi Zingales, 2004. "Private Benefits of Control: An International Comparison," Journal of Finance, American Finance Association, vol. 59(2), pages 537-600, 04. [Downloadable!] (restricted)
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  11. Martin Holmen & John D. Knopf & Stefan Peterson, 2007. "Trading-off Corporate Control and Personal Diversification through Capital Structure and Merger Activity," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 34(9-10), pages 1470-1495. [Downloadable!] (restricted)
  12. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October. [Downloadable!] (restricted)
  13. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December. [Downloadable!] (restricted)
    Other versions:
  14. Øyvind Bøhren & Bernt Arne Ødegaard, 2001. "Patterns of Corporate Ownership: Insights from a unique data set," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 27, pages 55-86. [Downloadable!]
  15. Andriy Bodnaruk & Eugene Kandel & Massimo Massa & Andrei Simonov, 2008. "Shareholder Diversification and the Decision to Go Public," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 21(6), pages 2779-2824, November. [Downloadable!] (restricted)
  16. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, vol. 30(2), pages 585-603, May. [Downloadable!] (restricted)
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  1. Anaïs Hamelin, 2009. "Do small family businesses have a peculiar attitude toward growth? Evidence from French SMEs," Working Papers CEB 09-032.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
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