Trading-off Corporate Control and Personal Diversification through Capital Structure and Merger Activity

Authors

  • Martin Holmen,

    1. The authors are respectively from the Department of Economics, Uppsala University, Sweden; the University of Connecticut, Stamford, CT, USA; and Weavering Capital, Gothenburg, Sweden.
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  • John D. Knopf,

    1. The authors are respectively from the Department of Economics, Uppsala University, Sweden; the University of Connecticut, Stamford, CT, USA; and Weavering Capital, Gothenburg, Sweden.
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  • Stefan Peterson

    Corresponding author
    1. The authors are respectively from the Department of Economics, Uppsala University, Sweden; the University of Connecticut, Stamford, CT, USA; and Weavering Capital, Gothenburg, Sweden.
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  • They are particularly grateful to an anonymous referee and Peter F. Pope (editor) for insightful and useful comments on earlier drafts.

* Address for correspondence: John D. Knopf, University of Connecticut, One University Place, Stamford, CT 06901, USA.
e-mail: jknopf@business.uconn.edu

Abstract

Abstract:  In this study we use direct estimates of the portfolio diversification of the largest shareholder in a firm to study the impact of shareholder diversification on the firm. For firms where the controlling shareholder is an individual, our tests indicate that the owner-managers use debt, dual class shares and corporate control transactions (merger activity) to strategically trade off corporate control and the drawback of poor portfolio diversification. However, for firms where the controlling shareholder is an institution, our results indicate that control but not diversification is important.

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