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Diversification and Ownership Concentration

  • Loriana Pelizzon

    ()

    (Department of Economics, University Of Venice C� Foscari)

  • Bruno Maria Parigi

    (Department of Economics, University of Padua)

In a mean-variance economy where controlling shareholders can divert profits, equity ownership is more concentrated the higher the stock returns correlation. A higher returns correlation reduces the benefits of diversification, giving rise to both a higher investment by the controlling shareholder in the asset that he controls 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 investor protection, and other structural variables, we find that equity ownership is significantly more concentrated in countries where the stock returns correlation is higher. Moreover the intensity of the relationship between the stock returns correlation and ownership concentration is amplified by poor investor protection.

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Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2007_29.

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Date of creation: 2007
Handle: RePEc:ven:wpaper:2007_29
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