Insider Ownership and Shareholder Value: Evidence from New Project Announcements
George Washington University - School of Business
Washington University in Saint Louis - John M. Olin Business School
University of Houston, C. T. Bauer College of Business
December 9, 2011
AFA 2012 Chicago Meetings Paper
How does insider ownership affect shareholder value? We answer this question by examining how the marginal valuation of new investment projects announced by Indian firms varies with the level of insider holding in the firm, and other firm and project characteristics. We find that among projects announced by firms affiliated with business groups, announcement returns are significantly lower, and usually negative, for projects announced by firms with low insider holding. This effect is mainly driven by projects that result in either the firm or the business group diversifying into a new industry. On average, diversification projects announced by firms with low insider holding have negative announcement returns. The negative effect of low insider holding is larger in firms with high level of free cash flows. Overall, our results are consistent with insiders expropriating outside shareholders by selectively housing more (less) valuable projects in firms with high (low) insider holding.
Number of Pages in PDF File: 51
Keywords: Insider Holding, Business Groups, Diversification
JEL Classification: G30, G31, G32
Date posted: March 17, 2010 ; Last revised: December 11, 2011
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