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Large Shareholder Diversification and Corporate Risk-Taking

  • Mara Faccio
  • Maria-Teresa Marchica
  • Roberto Mura

Using new data for the universe of firms covered in Amadeus, we reconstruct the portfolios of shareholders who hold equity stakes in private- and publicly traded European firms. We find great heterogeneity in the degree of portfolio diversification across large shareholders. Exploiting this heterogeneity, we document that firms controlled by diversified large shareholders undertake riskier investments than firms controlled by nondiversified large shareholders. The impact of large shareholder diversification on corporate risk-taking is both economically and statistically significant. Our results have important implications at the policy level because they identify one channel through which policy changes can improve economic welfare. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 24 ()
Issue (Month): 11 ()
Pages: 3601-3641

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Handle: RePEc:oup:rfinst:v:24:y::i:11:p:3601-3641
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  1. Luc Laeven & Ross Levine, 2008. "Bank Governance, Regulation, and Risk Taking," NBER Working Papers 14113, National Bureau of Economic Research, Inc.
  2. Agrawal, Anup & Mandelker, Gershon N, 1987. " Managerial Incentives and Corporate Investment and Financing Decision s," Journal of Finance, American Finance Association, vol. 42(4), pages 823-37, September.
  3. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  4. Larry H. P. Lang & Mara Faccio & Leslie Young, 2001. "Dividends and Expropriation," American Economic Review, American Economic Association, vol. 91(1), pages 54-78, March.
  5. William N. Goetzmann & Alok Kumar, 2008. "Equity Portfolio Diversification," Review of Finance, European Finance Association, vol. 12(3), pages 433-463.
  6. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2008. "The Effect of Corporate Taxes on Investment and Entrepreneurship," NBER Working Papers 13756, National Bureau of Economic Research, Inc.
  7. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2000. "Ferreting Out Tunneling: An Application to Indian Business Groups," NBER Working Papers 7952, National Bureau of Economic Research, Inc.
  8. Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2008. "Employment risk, compensation incentives and managerial risk taking: Evidence from the mutual fund industry," CFR Working Papers 07-02, University of Cologne, Centre for Financial Research (CFR).
  9. Laeven, Luc & Levine, Ross, 2007. "Is there a diversification discount in financial conglomerates?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 331-367, August.
  10. repec:aea:jeclit:v:43:y:2005:i:3:p:655-720 is not listed on IDEAS
  11. Bertrand, Marianne & Johnson, Simon & Samphantharak, Krislert & Schoar, Antoinette, 2008. "Mixing family with business: A study of Thai business groups and the families behind them," Journal of Financial Economics, Elsevier, vol. 88(3), pages 466-498, June.
  12. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
  13. Randall Morck & Daniel Wolfenzon & Bernard Yeung, 2004. "Corporate Governance, Economic Entrenchment and Growth," NBER Working Papers 10692, National Bureau of Economic Research, Inc.
  14. Randall K. Morck, 2005. "A History of Corporate Governance around the World: Family Business Groups to Professional Managers," NBER Books, National Bureau of Economic Research, Inc, number morc05-1, August.
  15. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
  16. Hirshleifer, David & Thakor, Anjan V, 1992. "Managerial Conservatism, Project Choice, and Debt," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 437-70.
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