Insider ownership, power, and bank value

Jijun Niu

doi:10.18533/jefs.v4i04.243

Abstract

This paper examines the influence of insider ownership and power on bank value. We measure insider ownership as the fraction of the bank’s common stock owned by its directors and officers as a group, and insider power using the Milnor and Shapley (1978) power index for oceanic voting games. Using a sample of U.S. banks, we find that insider ownership is positively related to bank value, while insider power is negatively related to bank value. These results are consistent with the agency theory literature. To the extent that regulators want to increase bank value, they should encourage equity ownership by bank insiders and outside blockholders.

Highlights

Banks play two essential roles in a modern economy
We find that insider ownership is positively related to bank value, while insider power is negatively related to bank value
When we divide banks in our sample into two groups based on insider ownership, we find that the results hold whether banks have high or low insider ownership

Summary

Introduction

Banks play two essential roles in a modern economy. First, banks are liquidity creators (e.g., Diamond and Dybvig, 1983; Berger and Bouwman, 2009). Motivated by the importance of banks, many papers examine the influence of insider ownership and power on bank performance (e.g., Allen and Cebenoyan, 1991; Hadlock, Houston, and Ryngaert, 1999; Griffith, Fogelberg, and Weeks, 2002; Hughes et al, 2003; Gulamhussen, Pinheiro, and Sousa, 2012). In a recent paper, Basu, Paeglis, and Rahanmaei (2016) question the empirical validity of this assumption They first show that most U.S firms have multiple blockholders. Journal of Economic and Financial Studies and biases such as double counting They manually collect blockholder data for a large number of firms from corporate filings with the Securities and Exchange Commission (SEC), and make their dataset freely available to all researchers.

Insider ownership and firm value

Insider ownership and bank performance

Hypotheses

Findings

Conclusion