Portfolio selection: does corporate governance matter?

Abstract

PurposeThe purpose of this paper is to examine whether corporate governance has an impact on portfolio selection within the usual mean‐variance framework, the idea being that by reducing agency conflicts, corporate governance increases the value of the firm.Design/methodology/approachUsing a sample of 460 American firms between 1995 and 2004, the authors first determine the optimal mean‐variance portfolio. The authors then test whether governance characteristics explain the optimal portfolio weights.FindingsThe results show that the optimal portfolio weights are sensitive to internal control mechanisms, ownership concentration, managerial entrenchment and incentive compensation.Originality/valueThe results are relevant to academicians and investors concerned with portfolio selection. In fact, they underline the importance of including governance characteristics in their portfolio selection.