DP4411 Changes in Equity Ownership and Changes in the Market Value of the Firm

Author(s):	Karl Lins, John J. McConnell, Henri Servaes
Publication Date:	June 2004
Keyword(s):	executive stock purchases, firm value, insider ownership
JEL(s):	G14, G32
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=4411

We study the stock price response to announcements of share purchases by corporate insiders over the period 1994 through 1999. The cross-sectional variability in the response is consistent with a curvilinear relation between firm value and insider ownership, where the value of the firm first increases, then decreases as insider ownership increases. These results are consistent with a causal interpretation of the relationship between insider ownership and firm value. The results of further tests are inconsistent with an interpretation that the firms in our sample are moving toward a new equilibrium ownership level or that insiders are purchasing shares to signal that the firm is undervalued.