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The Arrow--Lind theorem revisited: ownership concentration and valuation

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  • Ziemowit Bednarek
  • Marian Moszoro

Abstract

According to Arrow and Lind (1970), the more shareholders participate in an investment and the more dispersed the ownership structure becomes, the lower the discount rate of an individual investor is due to risk sharing. This implies that the valuation of the investment should increase. Employing a data set of investor-level ownership records, asset pricing measures and managerial discretion proxies, we test Arrow and Lind's hypothesis of the relationship between ownership concentration and risk premium, and its implication for company valuation. We find that (i) contrary to previous studies on institutional ownership, greater ownership dispersion is associated with higher company valuation and (ii) managers are more likely to invest in fixed assets and hold less cash in companies with dispersed ownership. Our results remain robust after controlling for liquidity and governance by several measures. We argue that both results are interconnected: when ownership concentration is low, investors' lower premiums and managers' risk-neutral behaviour contribute to higher valuations.

Suggested Citation

  • Ziemowit Bednarek & Marian Moszoro, 2014. "The Arrow--Lind theorem revisited: ownership concentration and valuation," Applied Financial Economics, Taylor & Francis Journals, vol. 24(5), pages 357-375, March.
    • Handle: RePEc:taf:apfiec:v:24:y:2014:i:5:p:357-375
    DOI: 10.1080/09603107.2013.877569
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    Cited by:

    1. Lai, Shaojie & Liang, Hongyan & Liu, Zilong & Pu, Xiaoling & Zhang, Jianing, 2022. "Ownership concentration among entrepreneurial firms: The growth-control trade-off," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 122-140.
    2. Oleksy Paweł & Zyguła Andrzej, 2017. "The Effect of Ownership Structure on Dividend Policy and Shareholder Value: A Financialisation Perspective on Construction Companies in Poland," Central European Economic Journal, Sciendo, vol. 3(50), pages 41-52, December.
    3. Ichiro Iwasaki & Satoshi Mizobata, 2020. "Ownership Concentration and Firm Performance in European Emerging Economies: A Meta-Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(1), pages 32-67, January.
    4. Alfonso A. Rojo Ramírez & Maria J. Martínez Romero, 2018. "Required and obtained equity returns in privately held businesses: the impact of family nature—evidence before and after the global economic crisis," Review of Managerial Science, Springer, vol. 12(3), pages 771-801, July.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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