BFS 2002

Poster Presentation

This paper analyzes the problem of how large investors form optimal equity portfolios when the return on each investment depends on the size the investment. The solution counterweighs the benefits of higher returns through private benefits of control and monitoring efforts when an investor purchases a large equity block with the costs of bearing diversifiable risk. The model predicts that budget-constrained investors will be more likely to buy controlling blocks in smaller firms and in firms where higher private benefits of control can be secured. Numerical analysis of the solution shows that investor utility is strictly increasing in the capital allocated to purchasing controlling blocks. The classical result that the efficient frontier is the same for all investors regardless of their wealth does not hold in the setting of this paper. Investors holding portfolios of controlling equity blocks earn strictly positive abnormal returns at the expense of small investors.       http://www.personal.psu.edu/staff/v/a/vaa3/optimal_portfolios1.pdf