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MANAGERIAL OWNERSHIP CHANGE AND FIRM VALUE: EVIDENCE FROM DUAL‐CLASS RECAPITALIZATIONS AND INSIDER TRADING
Author(s) -
Hanson Robert C.,
Song Moon H.
Publication year - 1995
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1995.tb00567.x
Subject(s) - recapitalization , insider , business , commit , monetary economics , voting , accounting , value (mathematics) , financial system , economics , law , database , politics , political science , computer science , machine learning
We explore the relation between managerial ownership and firm value by examining a sample of firms that announce dual‐class recapitalizations and the insider trading activity that precedes these announcements. Insider trading activity, unlike recapitalization, requires managers to commit their personal wealth and therefore serves as an indicator of the motivation behind the recapitalization. The recapitalization, in effect, allows managers to magnify the increase in vote ownership that results from insider buying and offsets the decrease in vote ownership that results from insider selling. This study adds to our understanding of dual‐class recapitalizations by linking the wealth effects and changes in ownership concentration with ***manager‐shareholder agency issues that follow from recapitalization and insider trading activity. Results show a positive relation between the change in firm value and ownership for recapitalizations before the 1984 New York Stock Exchange moratorium on delisting dual‐class firms when ownership was high and control was firmly established. Results show a negative relation for recapitalizations since 1984 when ownership levels were lower and voting control was not assured. These results support the notion that more recent recapitalizations entrench managers.