Large Shareholder Diversification And Corporate Risk-Taking

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Executive Summary

Using new data for the universe of firms covered in Amadeus, the paper reconstructs the equity portfolios of shareholders who hold equity stakes in private and publicly-traded European firms. This paper finds great heterogeneity in the degree of portfolio diversification across large shareholders. Exploiting this heterogeneity, the authors document that firms controlled by diversified large shareholders undertake riskier investments than firms controlled by non-diversified large shareholders. The impact of large shareholder diversification on corporate risk-taking is both economically and statistically significant. The results have important implications at the policy level because they identify one channel through which policy changes aimed at improving capital market development and diversification can improve economic welfare.

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