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Changes in insider ownership and changes in the market value of the firm

  • McConnell, John J.
  • Servaes, Henri
  • Lins, Karl V.

The empirically-observed cross-sectional relation between the level of insider share ownership and the level of firm value has often been interpreted to mean that a change in share ownership can lead to a change in firm value. Such an interpretation has been criticized for ignoring potential endogeneity. In this paper, we perform two sets of tests to circumvent this alleged endogeneity. First, we measure changes in value over the 6-day interval around announcements of insider share purchases and find that the cross-sectional variability in changes in value is described by a curvilinear relation between firm value and insider ownership where the value of the firm first increases, then decreases, as insider share ownership increases. Second, we conduct tests to determine (1) whether the insider purchases are a response to changes in firm characteristics that require a new optimal equilibrium ownership level or (2) whether insiders are purchasing shares to signal that the firm is undervalued. We find no evidence to support these interpretations. Overall, our results are consistent with a causal interpretation of the empirical relation between insider ownership and firm value.

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Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 14 (2008)
Issue (Month): 2 (April)
Pages: 92-106

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Handle: RePEc:eee:corfin:v:14:y:2008:i:2:p:92-106
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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  12. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
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  16. Loderer, Claudio & Martin, Kenneth, 1997. "Executive stock ownership and performance Tracking faint traces," Journal of Financial Economics, Elsevier, vol. 45(2), pages 223-255, August.
  17. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 377-397, September.
  18. Clifford G. Holderness & Randall S. Kroszner & Dennis P. Sheehan, 1999. "Were the Good Old Days That Good? Changes in Managerial Stock Ownership Since the Great Depression," Journal of Finance, American Finance Association, vol. 54(2), pages 435-469, 04.
  19. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
  20. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
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