The Arrow-Lind Theorem Revisited: Ownership Concentration and Valuation

38 Pages Posted: 3 Oct 2010 Last revised: 4 Dec 2014

See all articles by Ziemowit Bednarek

Ziemowit Bednarek

California Polytechnic State University, Orfalea College of Business

Marian W. Moszoro

Warsaw School of Economics (SGH); International Monetary Fund (IMF); George Mason University - Department of Economics; George Mason University - Interdisciplinary Center for Economic Science (ICES)

Date Written: February 10, 2014

Abstract

According to Arrow and Lind (1970), the more shareholders participate in an investment and the more dispersed the ownership structure becomes, the lower the discount rate of an individual investor is due to risk sharing. This implies that the valuation of the investment should increase. Employing a dataset of investor-level ownership records, asset pricing measures, and managerial discretion proxies, we test Arrow and Lind's hypothesis of the relationship between ownership concentration and risk premium, and its implication for company valuation. We find that: (i) contrary to previous studies on institutional ownership, greater ownership dispersion is associated with higher company valuation and (ii) managers are more likely to invest in fixed assets and hold less cash in companies with dispersed ownership. Our results remain robust after controlling for liquidity and governance by several measures. We argue that both results are interconnected: when ownership concentration is low, investors' lower premiums and managers' risk-neutral behavior contribute to higher valuations.

Keywords: Arrow-Lind Theorem, Ownership Structure, Risk Sharing, Firm Value, Corporate Governance

JEL Classification: G12, G32, G34

Suggested Citation

Bednarek, Ziemowit and Moszoro, Marian W., The Arrow-Lind Theorem Revisited: Ownership Concentration and Valuation (February 10, 2014). Applied Financial Economics, Vol. 24, No. 5, 2014, pp. 357-375, IESE Business School Working Paper No. 06/2013, Available at SSRN: https://ssrn.com/abstract=1686357 or http://dx.doi.org/10.2139/ssrn.1686357

Ziemowit Bednarek

California Polytechnic State University, Orfalea College of Business ( email )

San Luis Obispo, CA 93407
United States

Marian W. Moszoro (Contact Author)

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

HOME PAGE: http://economics.gmu.edu/people/mmoszoro

George Mason University - Interdisciplinary Center for Economic Science (ICES) ( email )

400P Truland Building
George Mason University
Fairfax, VA 22030
United States

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