The diversification cost of large, concentrated equity stakes. How big is it? Is it justified?
AbstractWhile 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 InfoPaper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2009/22.
Length: 21 pages
Date of creation: 15 Jan 2009
Date of revision:
Publication status: Published in Finance Research Letters, 2009, pages 56-72.
Portfolio diversification; Large equity owners; Costs and benefits of equity ownership concentration; Private benefits.;
Other versions of this item:
- Ødegaard, Bernt Arne, 2009. "The diversification cost of large, concentrated equity stakes. How big is it? Is it justified?," Finance Research Letters, Elsevier, vol. 6(2), pages 56-72, June.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-25 (All new papers)
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