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Changes in insider ownership and changes in the market value of the firm

Journal

Journal of Corporate Finance

Subject

Finance

Publishing details

Journal of Corporate Finance 2008 Vol 14:2 p 92-106

Authors / Editors

Servaes H;McConnell J;Lins K

Biographies

Henri Servaes

Publication Year

2008

Abstract

The empirically-observed cross-sectional relation 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 measure changes in value over the 6-day interval around announcements of insider share purchases and find that the cross-sectional variability in changes in value is described by a curvilinear relation between firm value and insider ownership where the value of the firm first increases, then decreases, as insider share ownership increases. Second, we conduct tests to determine (1) whether the insider purchases are a response to changes in firm characteristics that require a new optimal equilibrium ownership level or (2) whether insiders are purchasing shares to signal that the firm is undervalued. We find no evidence to support these interpretations. Overall, our results are consistent with a causal interpretation of the empirical relation between insider ownership and firm value.

Keywords

The empirically-observed cross-sectional relation 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 b

Publication Research Centre

Institute of Finance and Accounting

Available on ECCH

No


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