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

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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://www1.uis.no/ansatt/odegaard/uis_wps_econ_fin/uis_wps_2009_22_odegaard.pdf
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Bibliographic Info

Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2009/22.

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Length: 21 pages
Date of creation: 15 Jan 2009
Date of revision:
Publication status: Published in Finance Research Letters, 2009, pages 56-72.
Handle: RePEc:hhs:stavef:2009_022

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Postal: University of Stavanger, NO-4036 Stavanger, Norway
Web page: http://www.uis.no/research/economics_and_finance
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Keywords: Portfolio diversification; Large equity owners; Costs and benefits of equity ownership concentration; Private benefits.;

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References

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

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