Portfolio Diversification, Market Power, and the Theory of the Firm

Posted by Social Science Research Network

Portfolio Diversification, Market Power, and the Theory of the Firm

By José Azar (University of Navarra)

Abstract:     This paper develops a model of firm behavior in the context of oligopoly and portfolio diversification by shareholders. Competition for shareholder votes among potential managers seeking corporate office leads to internalization and aggregation of shareholder objectives, including shareholdings in other firms, and the fact that shareholders are consumers and workers of the firms. When all shareholders hold market portfolios, firms that are formally separate behave as a single firm. I introduce new indices that capture the internalization effects from consumer/worker control, and discuss implications for antitrust, stakeholder theory, and the boundaries of the firm.

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