Shareholder Diversification and Bank Risk-Taking
56 Pages Posted: 21 May 2013 Last revised: 24 Dec 2014
Date Written: December 22, 2014
Using the entire universe of Bankscope and Amadeus Top 250,000 we construct the portfolios of shareholders who hold equity stakes in publicly traded and privately held European banks for each year over the period 1999–2008. We show that about 62% of banks’ ultimate largest shareholders are diversified investors, holding on average equity investments from thirteen companies in their portfolio. We exploit this heterogeneity to investigate the impact of their portfolio diversification on bank risk-taking. Our results show that the relation between portfolio diversification and bank risk-taking is both statistically significant and economically sizeable. Overall, these findings contribute to the literature by studying for the first time a specific channel through which financial development, in the form of bank shareholders’ diversification, affects the banks’ risk-taking decisions.
Keywords: largest shareholder portfolio diversification, bank risk-taking, capital allocation efficiency
JEL Classification: G11, G15, G21, G32, O16
Suggested Citation: Suggested Citation