Diversification and Ownership Concentration

Bruno Maria Parigi () and Loriana Pelizzon ()

No CESifo Working Paper No. 1590, CESifo Working Paper Series from CESifo Group Munich

Abstract: 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 affects 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.

Keywords: corporate governance; investor protection; private benefits; diversification opportunities (search for similar items in EconPapers)
JEL-codes: D80 G20 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2005
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Related works:
Working Paper: Diversification and Ownership Concentration (2007)
Working Paper: Diversification and ownership concentration (2005)
Journal Article: Diversification and ownership concentration (2008)
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