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Economic Consequences of Insider-ownership: An Emerging Market Perspective

Hassaan Tariq, Faisal Shahzad, Asim Anwar and Ijaz Ur Rehman

A chapter in Asia-Pacific Contemporary Finance and Development, 2019, vol. 26, pp 117-139 from Emerald Publishing Ltd

Abstract: Abstract This study investigates the impact of insider-ownership of publicly traded firms on their performance, cost of debt (COD) and cost of equity. We use a sample of 104 non-finance listed companies of Pakistan for the period from 2006 to 2016. Our study is conducted in Pakistan as a developing country in which insider-ownership is dominant, and a weak external corporate governance mechanism increases the payoffs from insider-ownership. We use feasible generalized least square (FGLS) regression methods to examine these hypotheses. Based on agency theory, we find that insider-ownership enhances firm performance. Furthermore, our results show that insider-ownership reduced the COD and equity. Higher ownership decreases the opportunistic behavior of insiders. It also reduces the creditor’s perception of the likelihood of default on loan payments and reduces agency issues among shareholders. The insider will invest in positive NPV projects which will help maximize shareholders’ wealth and minimize the COD. Similarly, the relationship between insider-ownership and cost of equity is significant but negative. Supporting the convergence of interest increase in ownership helps in aligning the goals of managers and stakeholders whereby the insider will focus on value creation by minimizing equity cost.

Keywords: Cost of debt; cost of equity; insider-ownership; firm performance; ownership structure; emerging market; D25; G35; G39 (search for similar items in EconPapers)
Date: 2019
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