The Effect of Institutional Investor Portfolio Diversification on Corporate Diversification
105 Pages Posted: 25 Nov 2020 Last revised: 18 Jun 2022
Date Written: April 5, 2022
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