Changes in Equity Ownership and Changes in the Market Value of the Firm
John J. McConnell
London Business School; Centre for Economic Policy Research (CEPR)
Karl V. Lins
University of Utah - Department of Finance
February 2, 2005
The empirically-observed cross-sectional relationship 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 regress changes in firm value against changes in insider ownership. We find that the cross-sectional variability in stock price responses to announcements of share purchases by corporate insiders is described by a curvilinear relation between firm value and insider ownership where the value of the firm first increases, then decreases, as insider ownership increases. Second, we test whether the firms in our sample are moving toward a new optimal equilibrium ownership level or that insiders are purchasing shares to signal that the firm is undervalued. We find no evidence to support this interpretation. Overall, our results are consistent with a causal interpretation of the relationship between insider ownership and firm value.
Number of Pages in PDF File: 43
Keywords: equity ownership, corporate governance
JEL Classification: G32
Date posted: November 20, 2003
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