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Changes in Equity Ownership and Changes in the Market Value of the Firm

43 Pages Posted: 20 Nov 2003  

John J. McConnell

Purdue University

Henri Servaes

London Business School; Centre for Economic Policy Research (CEPR)

Karl V. Lins

University of Utah - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 2, 2005


The empirically-observed cross-sectional relationship between the level of insider share ownership and the level of firm value has often been interpreted to mean that a change in share ownership can lead to a change in firm value. Such an interpretation has been criticized for ignoring potential endogeneity. In this paper, we perform two sets of tests to circumvent this alleged endogeneity. First, we regress changes in firm value against changes in insider ownership. We find that the cross-sectional variability in stock price responses to announcements of share purchases by corporate insiders is described by a curvilinear relation between firm value and insider ownership where the value of the firm first increases, then decreases, as insider ownership increases. Second, we test whether the firms in our sample are moving toward a new optimal equilibrium ownership level or that insiders are purchasing shares to signal that the firm is undervalued. We find no evidence to support this interpretation. Overall, our results are consistent with a causal interpretation of the relationship between insider ownership and firm value.

Keywords: equity ownership, corporate governance

JEL Classification: G32

Suggested Citation

McConnell, John J. and Servaes, Henri and Lins, Karl V., Changes in Equity Ownership and Changes in the Market Value of the Firm (February 2, 2005). Available at SSRN: or

John McConnell

Purdue University ( email )

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Henri Servaes (Contact Author)

London Business School ( email )

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London NW1 4SA
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Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
United Kingdom

Karl Lins

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-3171 (Phone)
801-581-7214 (Fax)

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