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Owners’ Portfolio Diversification and Firm Investment

Evgeny Lyandres¹; Maria-Teresa Marchica²; Roni Michaely³; Roberto Mura³

¹ Questrom School of Business, Boston University · ² Alliance Manchester Business School, University of Manchester · ³ Geneva Finance Research Institute, University of Geneva and SFI

Abstract Portfolio diversification of firms’ controlling owners influences their firms’ capital investment. Empirically, the effect of owners’ portfolio diversification on their firms’ investment levels is positive for publicly traded firms and tends to be negative for privately held ones. These findings are consistent with predictions of a model in which a risk-averse investor simultaneously chooses her portfolio structure, and both the level and riskiness of capital investment of the firm she controls, and in which the firm can be potentially constrained in its capital investment choices. Overall, our results indicate that owners’ portfolio underdiversification and firms’ financial constraints can affect firms’ resource allocation. Received May 3, 2017; editorial decision March 8, 2019 by Editor Francesca Cornelli. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

DOI

10.1093/rfs/hhz050

Volume

32 (12)

Pages

4855-4904

Language

en

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BibTeX

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