The cost and benefit of concentrated ownership

The objective of this project is to quantify the costs and benefits of being a large, undiversified owner who holds a large equity holding (block) in a firm. We estimate the cost for the largest investor in a firm by measuring what percentage of his wealth is invested in this firm and in every other firm. Since this allows us to construct the risk and return characteristics of the blockholder's equity portfolio, we can measure the cost of block holdings as the return difference between the investor's actual portfolio and that of a well diversified alternative portfolio with equivalent risk.
Benefits from holding a block of shares in a firm could arise from better monitoring of management. We attempt to measure this effect by ranking firms according to the size of the block held in the firm. If holding a block is beneficial then there should be a positive return difference between a portfolio of stocks with the highest block holdings and a portfolio of stocks with the lowest block holdings. This difference reflects the return benefit of concentrated ownership..
Since the cost of concentrated ownership is not well explored empirically in the international literature, we produce a fair amount of descriptive statistics. For instance, we document the typical number of firms that large owners invest in and the typical fraction of their wealth put into their largest investment. We show such statistics across different investor types, such as whether the largest owner is personal or institutional, national or international.

  • Bernt Arne Ødegaard: The diversification cost of large, concentrated equity stakes. How big is it? Is it justified? Fortcoming in Finance Research Letters