Effects of owners' diversification on their companies
Firms' controlling shareholder diversification contributes to their objective functions, especially risk taking. Strategies involving investment, quantity and price decisions as well as leverage and dividends influence profits. They also rely on the level of diversification of controlling shareholders. In this context, the EU-funded LYANDRES (Theoretical and empirical examination of the effects of shareholder diversification and mode of incorporation on firms' strategies and outcomes) project aims to study the consequences of controlling owners' portfolio diversification on their firms' investment. Project partners have developed a theoretical model to examine the effects of portfolio diversification for owners whose firms cope with various financial limitations. Different approaches were designed to test the model. For testing, the team used Amadeus, Europe's largest database for financial and business information on public and private companies. Data was gathered on firms' controlling owners and their portfolios as well as on firms' financial and accounting details. Researchers found a positive correlation between investment-to-assets ratios of public firms and their owners' portfolio diversification. Private firms revealed a negative correlation. They attribute this to the difference in financial constraints that the two types of firms have to deal with. To date, overall findings indicate that firms' investment strategies are directly affected by their owners' pursuit of best value for money. Project results led to a paper that was presented at seven research seminars in Europe and North America, and multiple conferences across Asia and Europe. LYANDRES will continue to investigate how owners diversify in public and private firms and the impact of such decisions on business performance.
Keywords
Controlling shareholders, shareholder diversification, portfolio diversification, public firms, private firms
