Large Shareholder Diversification and Corporate Cash Holding

Abstract

Using data for almost 360,000 European firms covered in Orbis Historical, I reconstruct the portfolios of shareholders who hold equity stakes in private and publicly traded firms between 2007 and 2020. I document a novel link between large shareholders' diversification and firms' cash holdings. Firms controlled by more diversified shareholders hold significantly less cash than those with less-diversified shareholders. The impact is both economically and statistically significant. Firms with nondiversified shareholders hold on average, more than double the cash of those with diversified shareholders. Results remain robust against tests for endogeneity and possible confounding effects.