The Dark Side of Insider Ownership

32 Pages Posted: 15 Mar 2013 Last revised: 20 Feb 2015

Vyacheslav Fos

Boston College - Department of Finance

Hwanki Brian Kim

University of Illinois at Urbana-Champaign - Department of Finance; UIUC

Mathias Kronlund

University of Illinois at Urbana-Champaign

Date Written: February 4, 2014

Abstract

This paper documents a new cost of insider ownership; we call this the minority-alignment cost. This cost arises when higher insider ownership incentivizes the insider to act in the best interest of a minority of shareholders. These actions thus hurt the interests of the majority of shareholders and therefore firm value. We document evidence consistent with this cost of insider ownership using a natural experiment caused by the 2012 presidential election and the impending fiscal cliff. In this setting, insiders (who are subject to dividend taxes) had a personal incentive to pay out large special dividends, and this incentive was stronger for insiders who owned a larger fraction of the firm. We show that when insider ownership was high, firms were less responsive to the tax incentives of the investor base (i.e., the fraction of taxable vs. non-taxable shareholders). Further, when there was more misalignment (high insider ownership combined with high ownership by non-taxable investors), these decisions had worse valuation implications and often destroyed firm value.

Keywords: Insider ownership; Institutional ownership; Dividends; Payout policy; Taxes; Agency Costs; Fiscal cliff

JEL Classification: G32, G34, G35, G38

Suggested Citation

Fos, Vyacheslav and Kim, Hwanki Brian and Kronlund, Mathias, The Dark Side of Insider Ownership (February 4, 2014). Available at SSRN: https://ssrn.com/abstract=2233724 or http://dx.doi.org/10.2139/ssrn.2233724

Vyacheslav Fos (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Hwanki Brian Kim

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://business.illinois.edu/finance/profile/brian-kim/

UIUC ( email )

Mathias Kronlund

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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