Insider Ownership and Shareholder Value: Evidence from New Project Announcements
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.
Prof Gopalan joined Olin in 2006 after graduating from the University of Michigan. Prior to his Ph.D., he worked for five years in the project finance department of a leading Indian bank. He researches issues in theoretical and empirical corporate finance. Specifically he examines questions related to a firm's choice between public and private ownership, the benefits of a business group structure in emerging economies and about firm-bank relationships and the syndicated loan market.