The Effect of Institutional Investor Portfolio Diversification on Corporate Diversification

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 relation between portfolio and corporate diversification that is robust to two quasi-natural experiments. 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: Suggested Citation

Boone, Audra and Celil, Hursit S. and Oh, Seungjoon and Selvam, Srinivasan, The Effect of Institutional Investor Portfolio Diversification on Corporate Diversification (April 5, 2022). Available at SSRN: https://ssrn.com/abstract=3700235 or http://dx.doi.org/10.2139/ssrn.3700235