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Diversification and ownership concentration

  • Bruno Parigi

    ()

    (University of Padua)

  • Loriana Pelizzon

    ()

    (University of Venice)

We consider a mean-variance general equilibrium economy where the expected returns for controlling and non-controlling shareholders are different because the former are able to divert a fraction of the profits. We find that when investor protection is poor, asset return correlation aspects ownership structure in a positive way. Higher return correlation lowers the benefits of diversification which causes a higher investment by the controlling shareholder in his asset and a lower investment by the non-controlling shareholders. The empirical analysis supports the predictions of the model. In particular, controlling for measures of the quality of the investor protection, the legal origin of the countries, and other structural variables as in a previous study by La Porta et al. (1998) we find that equity ownership is significantly more concentrated in countries where stock return correlation is higher, and that the magnitude of this effect is larger in countries where investor protection is poorer.

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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0005.

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Length: 47 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:pad:wpaper:0005
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