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Family ownership and the cost of under-diversification

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  • Richard Heaney
  • Martin Holmen

Abstract

We argue that the cost to a family of holding a large block of shares in a company, or under-diversifying, is reflected in the diversification benefits that the family forfeits. These costs can be substantial. For example, given a constant relative risk aversion parameter of 2, the median cost to our sample of families controlling large Swedish firms is 13% of the market value of firm's shares. We find that this cost is reduced by pyramid structures but not by the use of dual class shares.

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  • Richard Heaney & Martin Holmen, 2008. "Family ownership and the cost of under-diversification," Applied Financial Economics, Taylor & Francis Journals, vol. 18(21), pages 1721-1737.
    • Handle: RePEc:taf:apfiec:v:18:y:2008:i:21:p:1721-1737
    DOI: 10.1080/09603100701735912
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    Cited by:

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    2. Elisabeth Mueller, 2010. "Returns to Private Equity - Idiosyncratic Risk Does Matter!," Review of Finance, European Finance Association, vol. 15(3), pages 545-574.
    3. Arrondo-García, Rubén & Fernández-Méndez, Carlos & Menéndez-Requejo, Susana, 2016. "The growth and performance of family businesses during the global financial crisis: The role of the generation in control," Journal of Family Business Strategy, Elsevier, vol. 7(4), pages 227-237.
    4. Roger, Patrick & Schatt, Alain, 2016. "Idiosyncratic risk, private benefits, and the value of family firms," Finance Research Letters, Elsevier, vol. 17(C), pages 235-245.
    5. Laura Abrardi & Laura Rondi, 2020. "Ownership and performance in the Italian stock exchange: the puzzle of family firms," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(4), pages 613-643, December.
    6. Markus Schmid, 2009. "Ownership structure and the separation of voting and cash flow rights-evidence from Switzerland," Applied Financial Economics, Taylor & Francis Journals, vol. 19(18), pages 1453-1476.
    7. Randall Morck, 2009. "The Riddle of the Great Pyramids," NBER Working Papers 14858, National Bureau of Economic Research, Inc.

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