Anders G. Ekholm

Portfolio Concentration and Firm Performance

This paper investigates the relation between shareholders’ portfolio concentration and firm performance. Using data on more than 1.3 million unique shareholders, we create an index that measures how concentrated shareholder portfolios are in each firm. We posit that portfolio concentration will affect incentives when shareholders are resource constrained. We find that average shareholder portfolio concentration is significantly positively related to future operational performance and valuation. We also find that portfolio concentration is positively correlated with abnormal stock returns. Our findings suggest that shareholders with concentrated portfolios are more informed and play a governance role through the stock market.

Components of Portfolio Variance

An investment portfolio’s return variance is the sum of variance generated by passive systematic risk factor exposure, active security selection and active systematic risk factor timing. We show that the components of active risk can be estimated without knowledge of portfolio holdings. In a broad sample of US equity mutual funds classified as actively managed by Lipper in years 2000-2013, Carhart (1997) risk factors on average account for 94 %, security selection for 5 % and risk factor timing for 1 % of total variance. Security selection is positively associated to future performance, while systematic risk factor timing correlates negatively with future performance. Our new active variance measures – SelectionShare and TimingShare – complement ActiveShare and TrackingError in predicting future performance.