The Effect of Institutional Investor Portfolio Diversification on Corporate Diversification

98 Pages Posted: 25 Nov 2020 Last revised: 7 Oct 2021

See all articles by Audra L. Boone

Audra L. Boone

Texas Christian University - M.J. Neeley School of Business; European Corporate Governance Institute (ECGI)

Hursit Celil

Peking University - HSBC Business School

Seungjoon Oh

Peking University - HSBC Business School

Srinivasan Selvam

Peking University - HSBC Business School

Date Written: October 27, 2020

Abstract

We examine whether institutional investors' portfolio diversification affects corporate diversification and related practices. Estimating investor portfolio diversification using their holdings' return characteristics, we find a negative relationship between portfolio and corporate diversification that is robust to a quasi-natural experiment. Further, greater diversified ownership is associated with firms' distinctiveness, like undertaking fewer diversifying acquisitions and conducting non-core asset sales. These firms also have greater idiosyncratic risk and lower product market similarity to peers. Diversified blockholder counts, incentive compensation, quasi-indexer ownership, less volatile and non-crisis periods amplify our results. These findings illustrate how ownership structure can reshape the corporate landscape.

Keywords: Institutional Ownership, Indexing, Portfolio Diversification, Corporate Diversification, Product Similarity

JEL Classification: G23, G34, L25

Suggested Citation

Boone, Audra and Celil, Hursit and Oh, Seungjoon and Selvam, Srinivasan, The Effect of Institutional Investor Portfolio Diversification on Corporate Diversification (October 27, 2020). Available at SSRN: https://ssrn.com/abstract=3700235 or http://dx.doi.org/10.2139/ssrn.3700235

Audra Boone

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Hursit Celil

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China
+8675526033096 (Phone)

Seungjoon Oh

Peking University - HSBC Business School ( email )

Srinivasan Selvam (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China

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