Final Report Summary - LYANDRES (Theoretical and empirical examination of the effects of shareholder diversification and mode of incorporation on firms' strategies and outcomes) This project examines empirically the effects of portfolio diversification of controlling owners on firms' capital investment using a large sample of private and public firms. We find that investment of public firms, which tend to be relatively financially unconstrained, are positively related to their owners' portfolio diversification. This relation is economically sizable and is not driven by omitted owner characteristics, selection of firms by owners, reverse causality, or endogeneity of firms' mode of incorporation. The relation between owners' portfolio diversification and firm investment is significantly weaker and sometimes negative for private, relatively constrained firms. Our results suggest that controlling owners' portfolio diversification is an important determinant of firms' investment strategies, and that the effect of owners' diversification on investment depends crucially on the degree of financial constraints that firms face.The contribution of this project is twofold. First, we provide novel evidence on the role played by owners' portfolio diversification on corporate investment. We show that the relation between a firm's capital investment and its owner's portfolio diversification depends crucially on the firm's degree of financial constraints. Owners' diversification has a significantly positive impact on their firms' capital investment, but only for relatively financially unconstrained firms.Second, our project contributes to a small but growing empirical literature that examines differences between public and private firms' decisions. In particular, previous studies that investigate differences in public and private firms' capital investment find contrasting results. Our findings suggest that owners' portfolio diversification is an important and so far overlooked driver of firms' investment decisions. Our results have potentially relevant policy implications, given the crucial role in the economy played by private firms. Our findings suggest that to improve the allocation of capital and foster economic growth through capital investment, policy makers should not only improve firms' access to capital, but also reduce barriers to firm owners' portfolio diversification.
