Holding Companies and Financial Intermediation: Theory
Holding companies are instruments for structuring and organizing control over corporate decision-making. Such institutions permit large investors to influence corporate policies, but they can only function when small investors support the institution by supplying capital. Indeed, as was demonstrated in Chapter 2, holding companies issue shares to hold shares in other companies and a security substitution is consequently taking place in the Belgian capital market. The basic question we shall deal with in this chapter is to find the conditions under which small investors (those who cannot influence corporate decision-making) will accept the substitution of securities. Previous writers on the subject have argued that, because holding companies have interests in different companies in different sectors, they are able to present a diversified portfolio to the small investor. In line with recent developments in capital market theory it will be shown that such a reasoning is flawed and that only in imperfect capital markets will small investors find it profitable to buy holding company securities for diversifification.
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