Does Local Market Correlation Matter for Ownership Structure and Control Rights?

Abstract

We consider a general-equilibrium Capital Asset Pricing Model economy where the expected returns for controlling and non-controlling shareholders are different because the first can divert part of the profits. We show that local market correlation (the correlation between the returns of the risky assets) matters in determining ownership structure and control rights because it affects the loss from foregone diversification opportunities arising from concentrated ownership and the level of control benefits that non-controlling investors are willing to tolerate to achieve diversification. The empirical analysis support the model's conclusions. In particular our empirical findings on a group of countries are: ownership is more concentrated the higher is local market correlation; firm size and per capita income are higher the lower is local market correlation and control rights are affected by local market correlation.

Keywords: Corporate Governance, Market integration, CAPM

JEL Classification: D8, G2, G3