Agency Costs, Mispricing, and Ownership Structure

49 Pages Posted: 13 Nov 2009 Last revised: 13 Apr 2010

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

C. Fritz Foley

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Robin M. Greenwood

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2010

Abstract

Standard theories of corporate ownership assume that because markets are efficient, insiders ultimately bear agency costs and therefore have a strong incentive to minimize conflicts of interest with outside investors. We show that if equity is overvalued, however, mispricing offsets agency costs and can induce a controlling shareholder to list equity. Higher valuations support listings associated with greater agency costs. We test the predictions that follow from this idea on a sample of publicly listed corporate subsidiaries in Japan. When there is greater scope for expropriation by the parent firm, minority shareholders fare poorly after listing. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced.

Keywords: Ownership, Agency Costs, Mispricing

JEL Classification: G14, G32

Suggested Citation

Chernenko, Sergey and Foley, C. Fritz and Greenwood, Robin M., Agency Costs, Mispricing, and Ownership Structure (April 2, 2010). Available at SSRN: https://ssrn.com/abstract=1504253 or http://dx.doi.org/10.2139/ssrn.1504253

Sergey Chernenko

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
(765) 494-4413 (Phone)

HOME PAGE: http://https://sites.google.com/site/chernenkosergey/

C. Fritz Foley

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Robin M. Greenwood (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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