51 Pages Posted: 17 Mar 2010 Last revised: 11 Dec 2011
Date Written: December 9, 2011
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: 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