The Direction of Causality between Insider Ownership and Market Valuation

The causal relationship between insider ownership and market valuation is tested on a database of the largest EU and US companies. Using a Granger causality test insider ownership (measured by the fraction of closely held shares) is found to have a negative effect on market valuation (measured as the simple Tobin's Q ratio). And market valuation is found to have a negative effect on insider ownership. Consistent with an overall non-linear relationship as hypothesised by Morck et al. (1988) and Stultz (1988), the negative effect from insider ownership to performance is found to be significant only for companies with high initial levels of insider ownership, but insignificant for companies with low initial concentration levels. Furthermore, the effect on market valuation turns out to depend on system affiliation: it is only significant in continental Europe where average insider ownership is much higher than in the Anglo-American world (UK and US).