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Thursday, September 06, 2007

Paper on insider ownership and firm value in India

A key insight in the corporate governance literature concerns the relationship between insider ownership and firm value: "too little" insider ownership hurts the alignment of interests and "too much" insider ownership generates a lack of threat of takeover. In thinking about the Indian setting, I have generally worried that there is too little threat of takeover in India, so the complacence might set in pretty early in the game.

On this subject, I came across Insider Ownership and Firm Value by Manoj Pant and Manoranjan Pattanayak [pdf]. The abstract reads: This paper examines the effect of insider ownership on corporate value in India for the period of 2000-01 to 2003-04, using 1,833 Bombay Stock Exchange listed firms by investigating the relationship between insider’s equity holding and firm value. While the “convergence of interest” or “monitoring” hypothesis predicts a positive relationship, the “entrenchment” hypothesis predicts a negative one. This paper also provides evidence that the relationship between insider shareholding and firm value is not linear in nature and documents a significant non-monotonic relationship between the two. Tobin’s Q first increases, then declines and finally rises as ownership by insiders rises. It also confirms that foreign promoter / collaborator shareholding has a significant positive impact on firm value.

They don't seem to have been aware of a good paper on the same subject by Ekta Selarka in 2005; if someone can post a comment with a URL for this PDF, that'll help.


  1. Hi Ajaya,
    Yes, the realationship between insider share ownerhship and firm value is quite intriguing in Indian context given the large amount of share accumulated by insiders. However, the EPW paper clearly shows that higher insider stake is beneficial for the firm value. The same finding has been earlier confirmed by Sarkar and Sarkar's paper.
    In fact, foreign collaborator's shareholding of having a positive relation with firm value adds a new dimension to this research. We need to look into deeper. The mode of entry of foreign collaborator and whether there is any beneficial impact. I do not know about the other paper you are refering to. Is that a published one?

    Saritendu Pai

  2. The paper is published as "Ownership Concentration and Firm Value: A Study from Indian Corporate Sector" . Emerging Markets Finance and Trade, Vol. 41, No. 6, November-December 2005 Available at SSRN:

    Ekta Selarka


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