Optimal Portfolio Diversication and Product-Market Interactions
نویسنده
چکیده
Although most shareholders hold diversi ed portfolios, the corporate nance literature postulates that shareholders maximise rm value, while managers sometimes do not. We argue to the contrary that undiversi ed managers may care more about rm-level risk and return than about the value of their shareholdersdiversi ed portfolio. These two objectives may di¤er in presence of product-market interactions. We derive a nancial and product market equilibrium in presence of a large, diversi ed investor and a large number of small shareholders. Stock prices, asset allocation and product-market competition all depend on investorsrisk-aversion, initial endowment, and industry characteristics. We discuss implications to institutional investor activism, executive compensation contracts, venture capital, and the decision to go public.
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