The diversification cost of large, concentrated equity stakes. How big is it? Is it justified?
The diversification cost of large, concentrated equity stakes. How big is it? Is it justified?
By Bernt Arne Ødegaard, University of Stavanger and Norges Bank
Published in Finance Research Letters
Abstract
While the hypothesis that ownership concentration can affect
the value of a company has seen a lot of empirical study, little light has
been shed on a complementary problem, that these concentrated owners have
a cost of their position due to an undiversified portfolio. Using a
unique data set of the actual diversification of all Norwegian equity
owners, we show that the largest owners of a corporation in fact have very
undiversified equity portfolios, and that such owners have significant costs
to their concentrated portfolios. At the level of risk of a benchmark
portfolio, if they were to move from their present portfolio composition in
risky assets to a well diversified portfolio, their returns would have
increased by about 13 percentage points in annual terms. We ask whether
this cost can be explained by estimated benefits of ownership concentration
(private benefits), and show that extant estimates of private benefits are
too low to offset our cost estimates.
Keywords
Portfolio diversification, Large equity owners, Costs and benefits of equity ownership concentration, Private benefits.
JEL Codes
G10, G30.
A preprint verion of the Paper is available.
The final version of the paper can be found at