Premium
The Relationship Between Market Efficiency and Insider Ownership in Large and Small Firms
Author(s) -
Dowen Richard J.,
Bauman W. Scott
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00421.x
Subject(s) - insider , shareholder , agency cost , business , insider trading , agency (philosophy) , stock (firearms) , stock market , monetary economics , public ownership , principal–agent problem , relation (database) , stock price , economics , microeconomics , corporate governance , finance , market economy , mechanical engineering , paleontology , political science , law , engineering , database , series (stratigraphy) , computer science , philosophy , epistemology , horse , biology
The study examines insider ownership in large and small firms in relation to market efficiency. Recent studies have found a positive and significant relation between inside ownership and stock market performance. Such a finding is predicated upon the idea that inside ownership minimizes agency costs caused by the conflict between hired managers and shareholders. It is argued here that semi‐strong form market efficiency requires that all public information, including insider ownership, be quickly impounded into the price of a stock. If that is the case, the expected present value of a change in agency cost should be incorporated into the stock price shortly after any significant change in ownership. Hence, if the estimate is unbiased, the longer‐term performance of firms should not be effected by such changes. The issue is examined for both large, well‐known firms and for smaller, less‐known firms. The hypothesis that markets are generally efficient with respect to insider ownership information is rejected.