Owners' Portfolio Diversification and Firm Investment: Theory and Evidence from Private and Public Firms
68 Pages Posted: 12 Mar 2019 Last revised: 13 Mar 2019
Date Written: April 4, 2018
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 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 impact firms' resource allocation.
Keywords: diversification, strategies, private firms
JEL Classification: G11, G15, G31, G32
Suggested Citation: Suggested Citation