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The effects of institutional ownership on the value and risk of diversified firms

The effects of institutional ownership on the value and risk of diversified firms
The effects of institutional ownership on the value and risk of diversified firms
We study the link between institutional ownership and firms' diversification strategy, value and risk. Our sample includes US-listed firms with segment data from 1998 to 2012. We find that not all kinds of diversification are value-destroying; unlike industrially-diversified firms, global single-segment firms are trading at a premium relative to their imputed value. The presence of institutional investors and the stability of their shareholdings positively influence the likelihood that a firm is diversified. The proportion (volatility) of institutional ownership is higher (lower) among diversified firms compared to domestic single-segment firms. More importantly, the higher the proportions of institutional shareholdings, the higher the excess value of the diversified firm and the lower the firm idiosyncratic risk. Institutional ownership volatility, on the other hand, is inversely related to a firm excess value but positively related to its idiosyncratic risk. Thus, the presence of long-term stable institutional investors enhances the value of diversified firms. Our findings remain robust to various model specifications and estimation technique
1057-5219
207-219
Jafarinejad, Mohammad
a87a8a46-975a-4c6b-967f-75cbb8a358a6
Jory, Surendranath
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh N.
54ed0c1a-89c8-4cc0-a5fe-8a4b91490265
Jafarinejad, Mohammad
a87a8a46-975a-4c6b-967f-75cbb8a358a6
Jory, Surendranath
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh N.
54ed0c1a-89c8-4cc0-a5fe-8a4b91490265

Jafarinejad, Mohammad, Jory, Surendranath and Ngo, Thanh N. (2015) The effects of institutional ownership on the value and risk of diversified firms. International Review of Financial Analysis, 40, 207-219. (doi:10.1016/j.irfa.2015.05.019).

Record type: Article

Abstract

We study the link between institutional ownership and firms' diversification strategy, value and risk. Our sample includes US-listed firms with segment data from 1998 to 2012. We find that not all kinds of diversification are value-destroying; unlike industrially-diversified firms, global single-segment firms are trading at a premium relative to their imputed value. The presence of institutional investors and the stability of their shareholdings positively influence the likelihood that a firm is diversified. The proportion (volatility) of institutional ownership is higher (lower) among diversified firms compared to domestic single-segment firms. More importantly, the higher the proportions of institutional shareholdings, the higher the excess value of the diversified firm and the lower the firm idiosyncratic risk. Institutional ownership volatility, on the other hand, is inversely related to a firm excess value but positively related to its idiosyncratic risk. Thus, the presence of long-term stable institutional investors enhances the value of diversified firms. Our findings remain robust to various model specifications and estimation technique

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More information

Accepted/In Press date: 16 May 2015
Published date: July 2015
Organisations: Southampton Business School

Identifiers

Local EPrints ID: 394268
URI: http://eprints.soton.ac.uk/id/eprint/394268
ISSN: 1057-5219
PURE UUID: ed64b0d1-08ec-4bb2-9520-2769cae7bffc
ORCID for Surendranath Jory: ORCID iD orcid.org/0000-0002-8265-0001

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Date deposited: 12 May 2016 12:35
Last modified: 15 Mar 2024 03:45

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Contributors

Author: Mohammad Jafarinejad
Author: Thanh N. Ngo

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