Insider Ownership and Shareholder Value: Evidence from New Project Announcements

51 Pages Posted: 17 Mar 2010 Last revised: 11 Dec 2011

Meghana Ayyagari

George Washington University - School of Business

Radhakrishnan Gopalan

Washington University in Saint Louis - John M. Olin Business School

Vijay Yerramilli

University of Houston, C. T. Bauer College of Business

Date Written: December 9, 2011

Abstract

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.

Keywords: Insider Holding, Business Groups, Diversification

JEL Classification: G30, G31, G32

Suggested Citation

Ayyagari, Meghana and Gopalan, Radhakrishnan and Yerramilli, Vijay, Insider Ownership and Shareholder Value: Evidence from New Project Announcements (December 9, 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1571514 or http://dx.doi.org/10.2139/ssrn.1571514

Meghana Ayyagari

George Washington University - School of Business ( email )

Washington, DC 20052
United States

Radhakrishnan Gopalan

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Vijay Yerramilli (Contact Author)

University of Houston, C. T. Bauer College of Business ( email )

Houston, TX 77204
United States
713-743-2516 (Phone)

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