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Back to the Beginning: Does Investor Diversification Affect the Firm’s Cost of Equity?

Date: Friday, June 24th, 14:00—16:00

Location: 317, Ge Zhi Building, Liu Lin Campus

The public lecture

Given by

Assistant Professor: Zhanhui Chen

Nanyang Technological University


We test whether the diversification of marginal investor affects the underlying firms cost of equity. We use institutional investor holdings data to identify the marginal investor. We measure Institutional investor diversification as the goodness of fit of a benchmark asset pricing model with respect to the investor portfolio returns. We find that firms with less diversified investors have a higher cost of equity and lower real investment. These findings are not driven by firm size, idiosyncratic volatility, institutional ownership, liquidity, investor stock selectivity, or behavioral biases. Collective evidence leans toward the market incompleteness explanation Merton, 1987.

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