IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v70y2024i7p4441-4464.html
   My bibliography  Save this article

Ownership Concentration and Firm Value: New Evidence from Owner Stakes in IPOs

Author

Listed:
  • Borja Larrain

    (Escuela de Administración and FinanceUC, Pontificia Universidad Católica de Chile, Santiago, Chile)

  • Peter Roosenboom

    (Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, Netherlands)

  • Giorgo Sertsios

    (Lubar College of Business, University of Wisconsin–Milwaukee, Milwaukee, Wisconsin 53202)

  • Francisco Urzúa

    (City University of London, London EC1V 0HB, United Kingdom)

Abstract

We study the relationship between ownership concentration and firm value using hand-collected data on the stakes of owner–managers before and after initial public offerings (IPOs). We instrument for the reduction in stake using market returns shortly before IPOs. Short-run market returns are plausible instruments because owners engage in market timing by selling more when prior returns are high, but high short-run returns are unlikely to directly affect firm value years after the IPO. As predicted by agency theory, a large reduction in ownership concentration at the IPO is negatively related to valuation. Future asset growth is low when owners have low stakes.

Suggested Citation

  • Borja Larrain & Peter Roosenboom & Giorgo Sertsios & Francisco Urzúa, 2024. "Ownership Concentration and Firm Value: New Evidence from Owner Stakes in IPOs," Management Science, INFORMS, vol. 70(7), pages 4441-4464, July.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:7:p:4441-4464
    DOI: 10.1287/mnsc.2021.01039
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2021.01039
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2021.01039?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ljungqvist, Alexander P. & Wilhelm, William Jr., 2002. "IPO allocations: discriminatory or discretionary?," Journal of Financial Economics, Elsevier, vol. 65(2), pages 167-201, August.
    2. Coles, Jeffrey L. & Lemmon, Michael L. & Felix Meschke, J., 2012. "Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance," Journal of Financial Economics, Elsevier, vol. 103(1), pages 149-168.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    5. Barclay, Michael J. & Holderness, Clifford G., 1989. "Private benefits from control of public corporations," Journal of Financial Economics, Elsevier, vol. 25(2), pages 371-395, December.
    6. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    7. Isaiah Andrews & James H. Stock & Liyang Sun, 2019. "Weak Instruments in Instrumental Variables Regression: Theory and Practice," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 727-753, August.
    8. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    9. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2219-2257, October.
    10. Young, Alwyn, 2022. "Consistency without inference: instrumental variables in practical application," LSE Research Online Documents on Economics 115011, London School of Economics and Political Science, LSE Library.
    11. Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2011. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 907-942, August.
    12. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
    13. John Y. Campbell & Samuel B. Thompson, 2008. "Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1509-1531, July.
    14. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    15. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    16. Franck Bancel & Usha R. Mittoo, 2009. "Why Do European Firms Go Public?," European Financial Management, European Financial Management Association, vol. 15(4), pages 844-884, September.
    17. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 121-148.
    18. Wei Jiang, 2017. "Have Instrumental Variables Brought Us Closer to the Truth," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 6(2), pages 127-140.
    19. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
    20. Peter M. DeMarzo & Branko Uro, 2006. "Ownership Dynamics and Asset Pricing with a Large Shareholder," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 774-815, August.
    21. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
    22. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    23. Henderson, Brian J. & Jegadeesh, Narasimhan & Weisbach, Michael S., 2006. "World markets for raising new capital," Journal of Financial Economics, Elsevier, vol. 82(1), pages 63-101, October.
    24. Barclay, Michael J & Holderness, Clifford G, 1991. "Negotiated Block Trades and Corporate Control," Journal of Finance, American Finance Association, vol. 46(3), pages 861-878, July.
    25. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    26. Himmelberg, Charles P. & Hubbard, R. Glenn & Palia, Darius, 1999. "Understanding the determinants of managerial ownership and the link between ownership and performance," Journal of Financial Economics, Elsevier, vol. 53(3), pages 353-384, September.
    27. Paul A. Gompers & Josh Lerner, 2003. "The Really Long‐Run Performance of Initial Public Offerings: The Pre‐Nasdaq Evidence," Journal of Finance, American Finance Association, vol. 58(4), pages 1355-1392, August.
    28. Larrain, Borja & Sertsios, Giorgo & Francisco Urzúa I.,, 2021. "The going public decision of business group firms," Journal of Corporate Finance, Elsevier, vol. 66(C).
    29. Fahlenbrach, Rüdiger & Stulz, René M., 2009. "Managerial ownership dynamics and firm value," Journal of Financial Economics, Elsevier, vol. 92(3), pages 342-361, June.
    30. Demsetz, Harold & Villalonga, Belen, 2001. "Ownership structure and corporate performance," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 209-233, September.
    31. C. Fritz Foley & Robin Greenwood, 2010. "The Evolution of Corporate Ownership after IPO: The Impact of Investor Protection," The Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1231-1260, March.
    32. Fabisik, Kornelia & Fahlenbrach, Rüdiger & Stulz, René M. & Taillard, Jérôme P., 2021. "Why are firms with more managerial ownership worth less?," Journal of Financial Economics, Elsevier, vol. 140(3), pages 699-725.
    33. Lucas, Deborah J & McDonald, Robert L, 1990. "Equity Issues and Stock Price Dynamics," Journal of Finance, American Finance Association, vol. 45(4), pages 1019-1043, September.
    34. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    35. repec:bla:jfinan:v:59:y:2004:i:2:p:537-600 is not listed on IDEAS
    36. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    37. Ritter, Jay R, 1984. "Signaling and the Valuation of Unseasoned New Issues: A Comment," Journal of Finance, American Finance Association, vol. 39(4), pages 1231-1237, September.
    38. Itzhak Ben-David & John R. Graham, 2013. "Managerial Miscalibration," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(4), pages 1547-1584.
    39. Jean Helwege & Christo Pirinsky & René M. Stulz, 2007. "Why Do Firms Become Widely Held? An Analysis of the Dynamics of Corporate Ownership," Journal of Finance, American Finance Association, vol. 62(3), pages 995-1028, June.
    40. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    41. Young, Alwyn, 2022. "Consistency without Inference: Instrumental Variables in Practical Application," European Economic Review, Elsevier, vol. 147(C).
    42. DeAngelo, Harry & DeAngelo, Linda & Stulz, René M., 2010. "Seasoned equity offerings, market timing, and the corporate lifecycle," Journal of Financial Economics, Elsevier, vol. 95(3), pages 275-295, March.
    43. Slovin, Myron B & Sushka, Marie E, 1993. "Ownership Concentration, Corporate Control Activity, and Firm Value: Evidence from the Death of Inside Blockholders," Journal of Finance, American Finance Association, vol. 48(4), pages 1293-1321, September.
    44. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    45. Shai Bernstein, 2015. "Does Going Public Affect Innovation?," Journal of Finance, American Finance Association, vol. 70(4), pages 1365-1403, August.
    46. Larry H. P. Lang & Mara Faccio & Leslie Young, 2001. "Dividends and Expropriation," American Economic Review, American Economic Association, vol. 91(1), pages 54-78, March.
    47. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    48. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-1177, December.
    49. Murray Carlson & Adlai Fisher & Ron Giammarino, 2006. "Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance," Journal of Finance, American Finance Association, vol. 61(3), pages 1009-1034, June.
    50. Morten Bennedsen & Kasper Meisner Nielsen & Francisco Perez-Gonzalez & Daniel Wolfenzon, 2007. "Inside the Family Firm: The Role of Families in Succession Decisions and Performance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 647-691.
    51. James C. Brau & Stanley E. Fawcett, 2006. "Initial Public Offerings: An Analysis of Theory and Practice," Journal of Finance, American Finance Association, vol. 61(1), pages 399-436, February.
    52. José Luis Montiel Olea & Carolin Pflueger, 2013. "A Robust Test for Weak Instruments," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(3), pages 358-369, July.
    53. Downes, David H & Heinkel, Robert, 1982. "Signaling and the Valuation of Unseasoned New Issues," Journal of Finance, American Finance Association, vol. 37(1), pages 1-10, March.
    54. Roosenboom, Peter & Schramade, Willem, 2006. "The price of power: Valuing the controlling position of owner-managers in French IPO firms," Journal of Corporate Finance, Elsevier, vol. 12(2), pages 270-295, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Urzúa Infante, F., 2014. "Essays on ownership and control," Other publications TiSEM f17a9a42-f7a7-4ffa-a95d-a, Tilburg University, School of Economics and Management.
    2. Thomsen, Steen & Pedersen, Torben & Kvist, Hans Kurt, 2006. "Blockholder ownership: Effects on firm value in market and control based governance systems," Journal of Corporate Finance, Elsevier, vol. 12(2), pages 246-269, January.
    3. Hegde, Shantaram & Seth, Rama & Vishwanatha, S.R., 2020. "Ownership concentration and stock returns: Evidence from family firms in India," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    4. Harvey, Campbell R. & Lins, Karl V. & Roper, Andrew H., 2004. "The effect of capital structure when expected agency costs are extreme," Journal of Financial Economics, Elsevier, vol. 74(1), pages 3-30, October.
    5. Fabisik, Kornelia & Fahlenbrach, Rüdiger & Stulz, René M. & Taillard, Jérôme P., 2021. "Why are firms with more managerial ownership worth less?," Journal of Financial Economics, Elsevier, vol. 140(3), pages 699-725.
    6. Daniel Broxterman & Tingyu Zhou, 2023. "Information Frictions in Real Estate Markets: Recent Evidence and Issues," The Journal of Real Estate Finance and Economics, Springer, vol. 66(2), pages 203-298, February.
    7. González, Maximiliano & Guzmán, Alexander & Pombo, Carlos & Trujillo, María-Andrea, 2012. "Family firms and financial performance: The cost of growing," Emerging Markets Review, Elsevier, vol. 13(4), pages 626-649.
    8. Rihab Kriaa & Taher Hamza, 2021. "Control dilution of an initial owner post-IPO: the impact of characteristics of ownership structure," SN Business & Economics, Springer, vol. 1(3), pages 1-35, March.
    9. Basu, Nilanjan & Paeglis, Imants & Toffanin, Melissa, 2017. "Reading between the blocks," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 294-317.
    10. Stavros E. Arvanitis & Theodoros V. Stamatopoulos & Dimitris Terzakis, 2018. "Is There a Non-linear Relationship of Market Value with Cash and Ownership?," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 68(1), pages 3-25, January-M.
    11. Christian Weiss & Stefan Hilger, 2012. "Ownership concentration beyond good and evil: is there an effect on corporate performance?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(4), pages 727-752, November.
    12. Pradiptarathi PANDA & Jinesh PANCHALI, 2019. "Corporate ownership structure and performance: An enquiry into India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(621), W), pages 93-110, Winter.
    13. Taylan Mavruk & Conny Overland & Stefan Sjögren, 2020. "Keeping it real or keeping it simple? Ownership concentration measures compared," European Financial Management, European Financial Management Association, vol. 26(4), pages 958-1005, September.
    14. Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2011. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 907-942, August.
    15. Weiß, Christian, 2010. "The Ownership Concentration of Firms: Three Essays on the Determinants and Effects," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 30247, September.
    16. Fahlenbrach, Rüdiger & Stulz, René M., 2009. "Managerial ownership dynamics and firm value," Journal of Financial Economics, Elsevier, vol. 92(3), pages 342-361, June.
    17. repec:dau:papers:123456789/5922 is not listed on IDEAS
    18. Wu, Xueping & Wang, Zheng, 2005. "Equity financing in a Myers-Majluf framework with private benefits of control," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 915-945, October.
    19. Khosa,Amrinder & Ahmed,Kamran & Henry,Darren, 2019. "Ownership Structure, Related Party Transactions, and Firm Valuation," Cambridge Books, Cambridge University Press, number 9781108492195, October.
    20. Pedersen, Torben & Thomsen, Steen & Kvist, Hans Kurt, 2001. "The Direction of Causality Between Blockholder Ownership and Firm Value: US and EU Evidence," Working Papers 16-2001, Copenhagen Business School, Department of International Economics and Management.
    21. Lukas Setia‐Atmaja & George A. Tanewski & Michael Skully, 2009. "The Role of Dividends, Debt and Board Structure in the Governance of Family Controlled Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(7‐8), pages 863-898, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:70:y:2024:i:7:p:4441-4464. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.