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Insider Ownership and Investment Efficiency

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  • Bhatta, Bibek

Abstract

Agency problems in firms are known to influence suboptimal capital investment decisions. Using panel data of publicly listed firms in India, we find evidence that increased insider ownership is associated with lower investment efficiency, i.e. as insider ownership increases, firms show tendency to make capital investments beyond the optimal level. However, we do not find evidence of increased insider ownership leading to underinvestment (below the optimal level of capital investment). A plausible explanation, consistent with theory, is that such insiders are making capital investments for private gain and empire-building rather than in the best interest of the firm. Additional analyses show that the presence of independent directors on the board of firms mitigates such value-destroying investments stemming from increased insider ownership.

Suggested Citation

  • Bhatta, Bibek, 2020. "Insider Ownership and Investment Efficiency," QBS Working Paper Series 2020/13, Queen's University Belfast, Queen's Business School.
    • Handle: RePEc:zbw:qmsrps:202013
    DOI: 10.2139/ssrn.3744165
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    References listed on IDEAS

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    More about this item

    Keywords

    Investment efficiency; Tobin's Q; insider ownership; suboptimal investment; overinvestment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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