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Portfolio Diversification and Corporate Finance

How company owners approach risk

Does the approach to risk that company owners take with their personal investments influence their wider investment strategy on behalf of their business?

This is the central question of a three-year Alliance-funded study being led by Maria-Teresa Marchica and Roberto Mura from the Manchester Accounting & Finance Group at Alliance MBS, together with Professor Evgeny Lyandres from Boston University and Professor Roni Michaely from Cornell University.

The impetus for the work stemmed from previous studies into the investment decisions of company directors based upon a database detailing company shareholdings across Europe.

As Maria explains: “We were able to reconstruct the database and identify the equity positions of a huge number of company owners across Europe. In so doing we realised that this opened up a whole new area of potential research.”

The database included a mix of private and public companies but the majority were private, reflecting the wider make-up of the European economy. For each owner the academics were then able to retrieve the amount of equity that they had in other companies.

Their initial study using the data found that 40% of company owners had investments in at least two different companies. Adds Maria: “We were actually slightly surprised by how low this figure was. What was also interesting was that these owners, on average, tended to invest in sectors they knew well such as their own.”

Wider impact

Following this initial work the team of academics was keen to assess the extent to which this behaviour affected the wider attitude towards risk of these company owners.

Says Maria: “We particularly wanted to test the theory that if you have a more diversified portfolio of personal investments then you are more likely to embrace more risk within your own business.”

Specifically the team looked at the impact of this ‘portfolio diversification’ of the company owners on three areas of corporate spending:

  • How does this affect their decisions in terms of fixed asset investments such as capital expenditure? The premise is that if the owner has a more diversified portfolio then he or she will invest more.
  • How does this affect the more general financial decisions that company owners take, such as how much cash to keep in the business? The premise is that an owner with a more diversified portfolio will keep less cash in the company.
  • What is the impact on innovation and R&D expenditure? The premise is that an owner with a more diversified portfolio will spend more on R&D and take a more innovative approach to business strategy. 


Maria says their studies so far are broadly supporting these conclusions. “It is certainly the case that the more diversified the owner’s portfolio then they tend to undertake more investment and capital expenditure. However an important consideration is the wider financial constraints that a company may be under as this will inevitably affect the kinds of investment decisions that are made. If a company does not have financial constraints then the owner is more willing to invest more, and vice versa.”

Maria also adds an important caveat: “We are only taking a partial view of the portfolio diversification of individuals based on their equity positions. We are not observing, for instance, if the owner has cash, bonds or maybe an extensive property portfolio. This requires further tests.”

Personal vs company

Until now the academic literature has always kept analysis of the personal investment decisions of a company owner separate from the decisions he or she takes on behalf of their company.

This blurring of the line between ‘personal’ and ‘company’ poses the most significant challenges to the study which, ultimately, will be able to make significant conclusions about the approach to risk that company owners take. Adds Maria: “We are looking to see how other databases can support our evidence so far and how we can overcome the testing questions that the analysis throws up.”