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Owners’ portfolio diversification and internal capital allocation

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  • Chi, Yung-Ling

Abstract

Using data on Taiwanese public firms from 2000–2017, this study demonstrates that firms’ capital investment decreases in controlling owners’ portfolio diversification. Causal evidence is obtained by exploring an exogenous shock that constrains the ability of shareholders to diversify. This relationship is attributable to the presence of an internal capital market among firms that share common ownership, which facilitates resource tunneling to affiliated entities. Consistent with the hypothesis, we find that the main effect is stronger when the internal capital market is more active and that the sensitivity of cash dividend payout to the firm's earnings increases in owners’ diversification.

Suggested Citation

  • Chi, Yung-Ling, 2022. "Owners’ portfolio diversification and internal capital allocation," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x21001839
    DOI: 10.1016/j.pacfin.2021.101676
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    More about this item

    Keywords

    Controlling shareholders; Portfolio diversification; Internal capital allocation; Capital investment;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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