Owners' portfolio diversification and firm investment: Theory and evidence from private and public firms

Evgeny Lyandres, Maria Marchica, Roni Michaely, Roberto Mura

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Abstract

Portfolio diversification of firms' controlling owners influences their firms' capital investment. Empirically, the effect of owners' portfolio diversification on their firms' investment levels is positive for publicly-traded firms and tends to be negative for privately-held ones. These findings are consistent with predictions of a model in which a risk-averse investor simultaneously chooses her portfolio structure, and the level and riskiness of capital investment of the firm she controls, and in which the firm can be potentially constrained in its capital investment choices. Overall, our results indicate that owners' portfolio underdiversification and firms' financial constraints can impact firms' resource allocation.
Original languageEnglish
Pages (from-to)4855–4904
JournalReview of Financial Studies
Volume32
Issue number12
Early online date11 May 2019
DOIs
Publication statusPublished - 2019

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