Insider Ownership and Investment Efficiency

31 Pages Posted: 7 Dec 2020

Date Written: December 7, 2020

Abstract

Agency problems in firms are known to influence suboptimal capital investment decisions. Using panel data of publicly listed firms in India, we find evidence that increased insider ownership is associated with lower investment efficiency, i.e. as insider ownership increases, firms show tendency to make capital investments beyond the optimal level. However, we do not find evidence of increased insider ownership leading to underinvestment (below the optimal level of capital investment). A plausible explanation, consistent with theory, is that such insiders are making capital investments for private gain and empire-building rather than in the best interest of the firm. Additional analyses show that the presence of independent directors on the board of firms mitigates such value-destroying investments stemming from increased insider ownership.

Keywords: Investment efficiency, Tobin’s Q, insider ownership, suboptimal investment, overinvestment

JEL Classification: G31, G32, G34

Suggested Citation

Bhatta, Bibek, Insider Ownership and Investment Efficiency (December 7, 2020). QMS Research Paper 13, Available at SSRN: https://ssrn.com/abstract=3744165 or http://dx.doi.org/10.2139/ssrn.3744165

Bibek Bhatta (Contact Author)

Queen's University Belfast ( email )

25 University Square
Belfast, BT7 1NN
Ireland

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