UiS Working Papers in Economics and Finance,
University of Stavanger

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

21 pages, January 15, 2009

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Published as

Bernt Arne Ødegaard, (2009), 'The diversification cost of large, concentrated equity stakes. How big is it? Is it justified?', Finance Research Letters, vol 6, pages 56-72

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