Diversified shareholders help firms withstand economic shocks, study finds

Euro area companies with more geographically diversified shareholders cut investment less sharply during the Covid-19 crisis than businesses whose investors were concentrated in their home country, according to a European Central Bank (ECB) working paper. The research found that, among companies hardest hit by the pandemic, those with less concentrated domestic ownership reduced investment by around 20 per cent less after the crisis struck, highlighting how international shareholders can help businesses withstand major economic shocks. The study examined listed companies across the euro area between 2015 and 2023, combining ECB data on securities holdings with company financial statements to assess where shareholders were based and how geographically concentrated ownership was. It found that domestic investors held an average of 57 per cent of euro area companies’ shares, while investors from other euro area countries accounted for just 9 per cent, with the remainder held by investors from outside the monetary union. These proportions remained broadly stable over time, suggesting that cross-border investment within the euro area has made little progress despite close economic and financial ties between member states. The researchers examined how these ownership patterns affected companies during the Covid-19 recession, particularly those that suffered the largest economic setbacks. Among the hardest-hit firms, exports fell by an average of 16 per cent. Companies with shareholders concentrated in their home country subsequently reduced investment more sharply, suffered greater falls in market value and experienced weaker recoveries. The study attributed much of this difference to what it described as equity resilience, whereby a more diversified shareholder base helps companies maintain access to equity financing when conditions deteriorate. Companies with more domestically concentrated ownership experienced a 13 per cent greater decline in the book value of their equity than more geographically diversified businesses. They also made less use of equity financing as their market valuations fell. By contrast, differences in sales, bank borrowing and cash holdings were comparatively limited, pointing towards the strength of companies’ equity financing as the main explanation for their differing investment performance. However, the authors cautioned that the findings do not establish that shareholder diversification alone caused the difference, as internationally diversified investors may also be associated with broader access to external finance and other unobserved advantages. The paper argues that deeper cross-border capital market integration could help European businesses withstand future crises by spreading investment risks across a wider pool of investors. The findings are relevant to the European Union’s Capital Markets Union initiative, which seeks to make it easier for businesses to obtain financing across national borders. Although euro area companies already have shareholders from outside the monetary union, the researchers said there was considerable untapped potential for greater investment between member states. They added that future research should examine foreign ownership in greater detail, investigate whether diversified shareholders are linked to a wider range of bank lenders, and establish whether the findings also apply to economic shocks beyond the Covid-19 crisis. The researchers said a better understanding of how cross-border ownership affects risk-sharing, investment decisions and the spread of economic shocks would help clarify the wider benefits of integrating European capital markets.