Portfolio selection: does corporate governance matter?

Purpose - The 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/approach - Using 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. Findings - The results show that the optimal portfolio weights are sensitive to internal control mechanisms, ownership concentration, managerial entrenchment and incentive compensation. Originality/value - The 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.