Investment Performance of Common Stocks in Relation to Insider Ownership

In this paper, the authors empirically examine whether corporations with high degrees of insider ownership enjoy superior returns compared with firms with more diffuse ownership. In addition, the authors evaluate the effects of insider ownership on security returns in relations to the well‐known effects of size and earnings yield (or price‐earnings) ratios. Results indicate that, in addition to Basu's price‐earnings effect, insider ownership is a new statistically significant variable that is associated with abnormal returns. This return anomaly might occur because the market pays an inadequate price for top managements' equity ownership, a firm‐specific fundamental variable that has a theoretical foundation in agency theory.