If 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: equity ownership is 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.

We investigate CEO turnover in relationship to performance, ownership concentration and CEO ownership in a sample of 60 private companies listed on the Italian Stock Exchanges over the 9-year period 1988–1996. Concentrated ownership, family control, limited institutional investors activism, and lack of main bank monitoring make Italy a corporate governance environment dominated by insiders. As a result, boards of directors are dominated by insiders and/or represent the interests of the controlling shareholders. Our main finding is that CEO turnover is negatively related to firm performance also in this environment, but this relationship holds only if the controlling shareholder is not the CEO. Our findings suggest that insiders with large stakes monitor and replace under-performing outside CEOs. The paper offers positive empirical evidence that non-CEO controlling shareholders are a governance mechanism that provides a substitute for outside members on boards of directors in lowering agency costs. When the CEO is an owner, however, we have all the negative aspects of insider-dominated boards.