Conventional wisdom is that diversification weakens governance by spreading investors too thinly. We show that, when investors own multiple firms (“common ownership”), governance through both voice and exit can strengthen—even if the firms are in unrelated industries. Under common ownership, informed investors have flexibility over which assets to sell upon a liquidity shock. They sell low-quality firms first, thereby increasing price informativeness. In a voice model, investors’ incentives to monitor are stronger since “cutting and running” is less profitable. In an exit model, managers’ incentives to work are stronger since the price impact of investor selling is greater.
Received December 5, 2017; editorial decision August 15, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
