Events

Finance Seminar

Author:

• Evgeny Lyandres
  Boston University

• Maria-Teresa Marchica
  University of Manchester

• Roni Michaely
  Cornell University

• Roberto Mura
  University of Manchester

We demonstrate theoretically and empirically that firms' capital investment depends on portfolio diversification of their controlling owners. The effect of owners' portfolio diversification on firms' investment levels depends crucially on firms financial constraints: the investment- diversification relation is positive for relatively unconstrained firms and is negative for relatively constrained ones. Owner fixed-effects, a quasi-natural experiment, and instrumental variable analysis suggest that this result is not driven by potential endogeneity of owners' diversification. A matched-sample analysis, selection model, and an alternative measure of financial constraints show that our findings are also not driven by the endogeneity of our proxy for financial constraints.