Diversification and corporate decisions

Abstract

Much of the empirical and theoretical work in corporate finance regards the assumption that shareholders want to maximize the value of the firm’s equity. However, most shareholders (at least in the US, UK and Canada) are well diversified and care about their portfolio value, and not the value of any particular firm. Corporate policies that encourage managers to maximize equity value may be suboptimal for these diversified shareholders. This study shows how various issues are significantly affected by shareholders’ diversification. These issues are: (1) the monitoring role of the board of directors; (2) the rationale behind corporate social responsibility, (3) the optimality of capital budgeting decisions, and; (4) the objective of executive compensation policies