Owners’ portfolio diversification and internal capital allocation

Yung-Ling Chi

Pacific-Basin Finance Journal, 2022, vol. 71, issue C

Abstract: Using data on Taiwanese public firms from 2000–2017, this study demonstrates that firms’ capital investment decreases in controlling owners’ portfolio diversification. Causal evidence is obtained by exploring an exogenous shock that constrains the ability of shareholders to diversify. This relationship is attributable to the presence of an internal capital market among firms that share common ownership, which facilitates resource tunneling to affiliated entities. Consistent with the hypothesis, we find that the main effect is stronger when the internal capital market is more active and that the sensitivity of cash dividend payout to the firm's earnings increases in owners’ diversification.

Keywords: Controlling shareholders; Portfolio diversification; Internal capital allocation; Capital investment (search for similar items in EconPapers)
JEL-codes: G11 G31 G32 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x21001839

DOI: 10.1016/j.pacfin.2021.101676

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