Higher Insider Ownership Research Articles

The impact of insider ownership and institutional ownership on post-earnings-announcement-drift: Evidence from Vietnam

In this study, we first document the existence of post-earnings-announcement-drift (PEAD) in Vietnam, consistent with investors’ under-reaction to earnings surprises. We then investigate whether and how institutional ownership and insider ownership affect PEAD. We find that the magnitude of PEAD effect is stronger among firms with higher insider ownership. We argue that higher insider ownership may increase information opacity and impede efficient processing of earnings news among investors. We provide supporting empirical evidence for this argument. Furthermore, in contrast to the conventional view that institutional investors exploit PEAD and accelerate the speed of price discovery, we find that institutional investors do not have significant impacts on PEAD. We argue that this result is consistent with recent findings in the US and China that some institutional investors may herd, hence, not necessarily help to mitigate PEAD. Our findings provide useful insights about the effect of insider investors and institutional investors on the delayed response to earnings news in the context of Vietnam.

Does the credibility of open market share repurchase matter?

Previous studies indicate that stock prices react positively to announcements of open market share repurchases (OMR). However, global evidence indicates that some firms announce OMR programs without repurchasing shares. Kracher and Johnson (1997) define such firms as guilty of poor credibility firms. This study investigates whether credibility measurements are associated with market responses using a sample of OMR announcements from 2001 to 2021. Benefitting from the complete information disclosure in Taiwan, an accurate completion rate and cost location variables are adopted to measure a firm's credibility. The results show that the proxy of credibility, i.e., the product of the completion rate and the cost location, positively affect market responses. In addition, a probit model is utilized to predict which firm-specific characteristics lead to high credibility. The findings reveal that firms with low market-to-book ratios, low return volatility, high insider ownership, good firm performance, low dividend yield, and are classified as electronics industry have a high probability of conveying credible signals to investors. Overall, the paper supports the existence of credibility effect and suggests that firms should value their credibility.

Organizational form and access to capital: The role of regulatory interventions

We examine how regulatory nudges mandating only disclosure of ownership information and no structural change impact a firm’s access to capital based on its organizational form. As a first of its kind, Clause 35 in India (characterized by weak enforcement and concentrated ownership) only required classifying shareholders into insiders and outsiders. Pre-regulation, group-affiliated firms exhibited lesser financial constraints than standalone firms. This reverses post-regulation, especially for group firms with higher insider ownership. More so for those with weaker compensating mechanisms or poorer future performance. In essence, regulation exclusively requiring information disclosure has been effective in reallocating capital more efficiently to firms with fewer agency problems.

Institutional ownership and insider trading profitability: Evidence from an emerging market

As institutional investors play a significant role in improving corporate governance and stabilizing the stock market in China, we test whether and how institutional ownership affects insider trading profitability in China. Our empirical findings show that institutional ownership reduces the profitability of total insider trading and insider sales but increases the profitability of insider purchases, which is consistent with the difference between Chinese regulators' attitudes toward insider sales and their attitude toward purchases. Our findings are robust to the inclusion of firm fixed effects, alternative proxies and the consideration of self-selection bias and endogeneity problems. The mediation analyses indicate that institutional investors reduce the agency costs associated with insider trading mainly through their direct rather than indirect monitoring activities. Moreover, we find that the effect of institutional ownership on insider trading is most prevalent in firms that are non-state-owned enterprises and that have high insider ownership, which validates the governance role of institutional investors. Furthermore, we find that insider trading profitability is significantly affected by firms' ownership by pressure-resistant institutional investors, but not by firms' ownership by pressure-sensitive institutional investors.

Delaware’s Dominance, Wyoming’s Dare. New Challenges, Same Outcome?

Despite an increased criticism, Delaware’s dominance has not been experiencing a significant decline: as of today, 67.8% of Fortune 500 companies are still incorporated in this jurisdiction. Nevada is known as Delaware’s most important competitor, with an aggressive strategy that overrode the effort of any other jurisdiction. Yet, its success has been limited to a specific market segment: small firms with low institutional shareholding and high insider ownership. Scholars suggest several explanations for both the rise and the staying power of Delaware. These explanations are essentially subsumed under the credible commitment theory and the network theory. According to the former, investors rely upon Delaware commitment towards the business community; whilst the latter emphasises how Delaware is profiting from the position achieved. The credible commitment theory and the network theory sometimes overlap and combine. Both predict that Delaware is hard to dethrone. In recent years, commentators have argued that this hegemony might be endangered by two different threats: the migration of cases induced by Delaware courts’ response to overlitigation; and the invasive growth of federal regulation—in particular, the possible introduction of a federal incorporation. Yet, criticism and predictions on Delaware’s decline are recurring and always follow the same pattern. Unsurprisingly, the migration turned out to be marginal; and the debate on a federal incorporation was revived in conjunction with a political campaign but fizzled out afterwards. I contend that a mounting challenge to Delaware’s dominance is mostly going off the radar. Wyoming is targeting a new segment of the market for corporate charters: i.e., cryptocurrency businesses. This jurisdiction is attempting to attract these incorporators by enacting liberal legislation and providing their companies with a safe harbour. Wyoming’s aggressive stance provides the motivation to canvass causes and consequences, criticism and challenges to Delaware’s dominance. The investigation might generate insights as to why Wyoming’s strategy will succeed or fail. In fact, this market segmentation approach is the same tactic that Nevada adopted, though Wyoming is applying the strategy to a sector that has meaningful growth potential and is pushing it to the point of introducing exemptions to state securities laws and banking regulation. The application of the credible commitment theory and of the network theory to Wyoming’s approach suggests that the strategy of building a reputation and proving a commitment to tech-incorporators is correct but is also conditioned upon a confluence of events which also needs time. Wyoming should develop an expertise that is too costly to be easily replicated by other jurisdictions and earn a share of the charters market before federal legislature and regulatory bodies pre-empts Wyoming’s law for cryptocurrencies. To the extent that Wyoming’s strategy proves to be effective, it will gain this jurisdiction the lead only in the blockchain segment of the market, whilst Delaware will continue to dominate the rest of it. In light of all this, Wyoming’s approach might be a dare. Yet, it is also the most promising—maybe the only possible—strategy to challenge Delaware’s dominance at the present time. (27(1) Fordham Journal of Corporate & Financial Law forthcoming 2021) See also https://www.law.ox.ac.uk/business-law-blog/blog/2021/03/delawares-dominance-wyomings-dare-blockchain-companies-and-market

Arrests and indictments of corporate insiders, ownership structure, and corporate governance: Evidence from Korea

AbstractWe find evidence that higher insider ownership is significantly associated with lower incidences of insider arrests and indictments in the Korean stock market for the period of 2000 through 2015. This evidence is robust to different measures of insider ownership: Cash flow rights, control rights, wedge, and managerial ownership. Our findings are consistent with the view that the larger ownership combined with longer tenure of corporate insiders, while potentially entrenching insiders, extend the time horizon of these insiders so that they have stronger incentives to minimize the incidences of severe and serious corporate crimes, as reflected in insider arrests and indictments, that can substantially harm long‐term firm value.

Managerial ownership, credit market conditions, undervaluation and offer premiums in management (MBOs) and leveraged buyouts (LBOs)

This paper investigates the impact of lending conditions and undervaluation on the buyout choice and offer premiums in MBO versus LBO decisions. We control for endogeneity and self-selection using a two-stage regression model in a sample of US transactions. Firms with higher insider ownership are more likely to select an MBO, whereas easy lending conditions increase the likelihood of an LBO. Determinants of offer premiums are also significantly different. Our main conclusion is that many factors (in addition to managerial ownership) should be accounted for to better understand the sources of value creation in going private transactions.

Organizational Form and Access to Capital: The Role of Regulatory Interventions

We examine the impact of a regulation that requires only disclosure of ownership information and no real change of firm fundamentals, on a firm’s access to capital. As a first of its kind corporate governance regulation across the globe, Clause 35 of the Securities Exchange Board of India required firms to classify shareholders into insiders and outsiders only, with no other structural changes. Using a large sample of publicly traded firms in India, a market characterized by weak enforcement and concentrated ownership, we find that prior to the regulation and as expected from literature, group-affiliated firms exhibited better access to capital (lower investment-cash flow sensitivity) than standalone firms. However, this reverses after the regulation, i.e., group-affiliated firms face more financial constraints (higher investment-cash flow sensitivity). This increase in sensitivity is restricted to only group firms with higher insider ownership, especially for firms which have no compensating mechanisms (weaker governance/monitoring) or perform poorly in the future. In essence, we find that regulation exclusively requiring information disclosure has been effective in reallocating capital more efficiently to firms with fewer agency problems.

Which Firms Require More Governance? Evidence from Mutual Funds' Revealed Preferences

This paper estimates mutual funds’ preferences for governance structures, using data on proxy vote records. I elicit funds’ revealed preferences by studying the differences in their votes on the same issue across their portfolio firms’ shareholder proposals, and develop funds’ preference rankings by implementing the Metropolis-Hastings Markov chain Monte Carlo algorithm. Funds prefer firms with low board independence, high insider ownership, and high abnormal compensation to adopt certain governance provisions that increase shareholder rights. Contrary to the view that the net benefits of takeover defenses are higher for young and small firms, funds are not enthusiastic about large and mature firms increasing shareholder rights. Large and mature firms are disproportionately targeted by shareholder proposals, suggesting the possibility that investors vote down worthless proposals submitted to such firms. I find a mixed relation between fund preferences and firm performance. Active and passive funds have similar preferences. Fund preferences are moderately correlated with overall vote support on relevant shareholder proposals.

The impact of high insider ownership on SOX 404 internal controls

PurposeThis study aims to investigate the effect of high insider ownership on firms’ internal controls over financial reporting. In particular, it examines how high insider ownership affects the likelihood of an adverse Sarbanes–Oxley Act Section (SOX Section 404) opinion and its subsequent remediation.Design/methodology/approachTests of hypotheses use ineffective controls and remediation models. The initial tests in this study use ineffective internal controls over financial reporting probit regression models to investigate how high insider ownership affects the ex-post likelihood of an adverse 404 opinion. Two remediation models – a multinominal probit regression and probit regression model – are used to investigate the effect of high insider ownership on the likelihood of successfully remediating an adverse 404 opinion.FindingsResults show that while the ex-ante likelihood of an adverse SOX Section 404 auditor’s internal control opinion increases with high insider ownership, high insider ownership firms are more likely to remediate ineffective 404 controls. This study rationalizes these diverse findings by asserting that prior to an adverse 404 opinion, entrenched managers avoid internal control financial reporting oversight and monitoring. After an adverse opinion, however, and within the context of an imminent and explicit value reducing 404 opinion, powerful high insider owner managers are motivated to remedy ineffective controls.Originality/valueThis research synthesizes existing streams of literature on insider ownership and the effectiveness of internal control over financial reporting quality to provide new information on the effects of high insider ownership on firms’ internal controls.

Trust and IPO underpricing

This study examines the impact of trust on initial public offering (IPO) underpricing using a large sample of IPO firms in China. We find that firms in regions of high social trust have lower underpricing, consistent with the notion that IPO firms in low-trust regions have to offer greater underpricing to secure participation. This result is robust to a battery of sensitivity tests and after controlling for endogeneity using instrumental variables. We also find that the negative relation between social trust and underpricing is more prominent for small and growth firms, and firms in high-tech industries, consistent with trust playing a more important role in asymmetric information environments. This relation is less pronounced for firms with high insider ownership and political connections, suggesting that investors rely less on trust in these cases; it is less salient when firms are in regions with high quality legal institutions and high average education levels, consistent with trust being a substitute for formal institutions.

Determinants and Consequences of a Voluntary Turn Away from IFRS to Local GAAP: Evidence from Switzerland

We examine determinants and consequences of a turn away from International Financial Reporting Standards (IFRS) to local generally accepted accounting principles (GAAP), thereby exploiting a unique feature of the Swiss setting in which listed firms are allowed to switch from IFRS to Swiss GAAP, all else being equal. We posit that net benefits of IFRS are less for small firms with higher insider ownership. In addition, we predict that the net benefits of IFRS are not constant over time because of changes in IFRS and/or changes in firm-specific circumstances. To the extent that the switching firms’ costs of IFRS reporting outweigh its benefits, we do not predict adverse capital-market effects after a switch. Consistent with predictions, we find that (a) small firms with higher insider ownership and fewer foreign investor holdings are more likely to switch, (b) increasing reporting costs as well as changes in firm-specific circumstances affect switching propensity, (c) switching firms substantially reduce their disclosures after they switch, and (d) switching firms neither experience a decrease in liquidity nor negative announcement returns. Overall, our findings are important for standard setters and securities regulators in shaping (future) reporting requirements for listed firms.

CSR Performance, Dividend Payout and Governance Mechanisms

In this article, we study whether Corporate Social Responsibility (CSR) performancehas an influence on dividend payout ratios. We provide evidence that high CSR firmspay more dividends than other firms. We also find that the positive relationshipbetween CSR performance and dividend payout is observed only for firms in highinvestor protection countries, for firms with high insider ownership, and with highanalyst coverage. These findings provide support for the agency view of CSR whichposits that CSR activities may be related to the managerial expropriation of shareholders. Dividend policy seems to be a tool used to mitigate this problem. Hence, inaccordance with the “outcome model” of dividend policies, we highlight that the linkbetween CSR performance and dividend payout is significant only when internal orexternal governance mechanisms are strong. This indicates that dividend policy andgovernance mechanisms are complementary and not substitute mechanisms to limitpotential expropriation linked to CSR policies.

CSR Performance, Dividend Payout and Governance Mechanisms

In this article, we study whether Corporate Social Responsibility (CSR) performancehas an influence on dividend payout ratios. We provide evidence that high CSR firmspay more dividends than other firms. We also find that the positive relationshipbetween CSR performance and dividend payout is observed only for firms in highinvestor protection countries, for firms with high insider ownership, and with highanalyst coverage. These findings provide support for the agency view of CSR whichposits that CSR activities may be related to the managerial expropriation of shareholders. Dividend policy seems to be a tool used to mitigate this problem. Hence, inaccordance with the “outcome model” of dividend policies, we highlight that the linkbetween CSR performance and dividend payout is significant only when internal orexternal governance mechanisms are strong. This indicates that dividend policy andgovernance mechanisms are complementary and not substitute mechanisms to limitpotential expropriation linked to CSR policies.

The Influence of Insiders and Institutional Owners on the Value, Transparency, and Earnings Quality of Chilean Listed Firms

In 1980, Chile privatized its social security system, and currently there are five private pension funds managing approximately US$83 billion worth of retirement investments. The regulations provide for pension funds to appoint a member to the board of directors, and influence the appointment of auditors. Thus, institutions are playing a major role in Chile's transition a market-based financial system. The study uses data from 70 firms from 1995-2005 to test the impact of these institutional changes on firm value, transparency levels and earnings quality. The study finds that insider ownership levels and institutional ownership positively affects firm value but these factors, and the pension fund representation on firm boards negatively affects the transparency index. Further, institutional ownership levels also encourage the entrenched owners to use positive discretionary accrual to manage earnings. Using agency theory, we suggest that high insider ownership levels are an equilibrium that helps managers co-opt institutions by providing access to information, which bestows private benefits control to stakeholders aligned with entrenched insiders' interests.

Does Management Ownership Have Negative Consequences? Evidence from a Natural Experiment

This paper documents a new cost of insider ownership; we call this the minority-alignment cost. This cost arises when higher insider ownership incentivizes the insider to act in the best interest of a minority of shareholders. These actions thus hurt the interests of the majority of shareholders and therefore firm value. We document evidence consistent with this cost of insider ownership using a natural experiment caused by the 2012 presidential election and the impending fiscal cliff. In this setting, insiders (who are subject to dividend taxes) had a personal incentive to pay out large special dividends, and this incentive was stronger for insiders who owned a larger fraction of the firm. We show that when insider ownership was high, firms were less responsive to the tax incentives of the investor base (i.e., the fraction of taxable vs. non-taxable shareholders). Further, when there was more misalignment (high insider ownership combined with high ownership by non-taxable investors), these decisions had worse valuation implications and often destroyed firm value.

Causes and Consequences of a Voluntary Turn Away from IFRS to Local GAAP

This paper examines whether current IFRS are too extensive (i.e., costs exceed benefits) for small and mid-cap companies (SMCs). We analyze determinants and consequences of a turn away from IFRS, thereby exploiting a unique feature of the Swiss setting in which listed firms are allowed to switch from IFRS to Swiss GAAP, all else equal. We predict that small firms with high insider ownership are more likely to switch because of a lower demand for public accounting (IFRS) information. To the extent that the supply of information as required by IFRS exceeds the switching firms’ demand for information, we do not predict adverse capital-market effects after a switch. Consistent with predictions, we find that (a) small firms with higher insider ownership and fewer foreign investor holdings are more likely to switch, (b) switching firms substantially reduce their disclosures, and (c) only firms with more dispersed ownership experience a decrease in liquidity after they switch. Overall, our findings are important for standard setters and securities regulators in shaping the (future) reporting requirements for listed firms.

Corporate Governance, Finance, and the Real Sector

AbstractWe present a theory of the linkages between corporate governance, corporate finance, and the real sector of an economy. Using a structural model of industry equilibrium with endogenous entry, we show that poor corporate governance leads to low levels of competition, and to firms with high insider ownership and leverage. In contrast, good corporate governance promotes the adoption of more efficient technologies and development of sectors more exposed to moral hazard. We use our model to study equity market liberalization, and we show that liberalizations facilitate entry and adoption of more productive technologies, especially in countries with good corporate governance.

Do Investors Understand ‘Operational Engineering’ before Management Buyouts?

During the year prior to management buyout (MBOs) announcements, target firms exhibit abnormally high discretionary expenses in selling, general and administration, abnormally low discretionary accruals, and realize losses from asset sales. Higher discretionary expenses and losses from asset sales are associated with lower pre-MBO abnormal stock returns, especially for firms with higher insider ownership, less board and institutional monitoring, and higher information asymmetry. They are also associated with better post-MBO operating performance. None of these activities affects the likelihood of MBO deal completion, announcement period abnormal returns, or offer premium. These target firms do not show such abnormal activities in other years before the MBOs or after the MBOs. Our results suggest that outside investors and the market do not fully understand the earnings-reducing activities before MBOs.

Investors Understanding of the ‘Financial and Operational Engineering’ Before Management Buyouts and Post-MBO Performance

During the year prior to management buyout (MBOs) announcements, target managers seem to lower earnings through opportunistic ‘financial and operational engineering’ activities, i.e., abnormally low discretionary accruals, abnormally high discretionary expenses (mainly R&D and advertising expenses), and realizing losses from asset sales. The latter two are real activities and are associated with lower pre-MBO abnormal stock returns, mainly for firms with higher insider ownership, less institutional monitoring, and greater information asymmetry, whereas discretionary accruals are not. The real activities also seem to improve post-MBO operating performance. None of these earnings-reducing activities affects deal completion likelihood, announcement period abnormal returns, or offer premiums for MBOs. Managers do not seem to influence earnings in other years around the MBOs. Our results suggest that these ‘financial and operational engineering’ activities permit target managers to acquire targets “on the cheap” and to earn higher post-MBO investment returns through wealth transfers from pre-MBO shareholders to post-MBO owners instead of value creation.