Disproportionate Insider Control and Firm Performance

• In Event: Research Paper Session—FARS

Abstract

Several studies link disproportionate insider control rights to lower firm value as measured by Tobin’s Q. We expand upon this work by examining the relationship between disproportionate control and accounting-based measures of profitability and firm efficiency. Ex ante, the impact of disproportionate insider control on firm performance is ambiguous: excess control may enhance insiders’ ability to expropriate perquisites at the cost of minority shareholders, resulting in poorer performance; on the other hand, disproportionate control enables insiders to take a long-term perspective with resulting positive effects on performance. Controlling for sample selection bias and endogeneity, and using a comprehensive, hand-collected sample of U.S. dual-class firms, we find results consistent with the latter alternative: excess insider control is positively associated with firm performance across multiple metrics. Contrary to prior research, we also find no evidence for reduced performance when firms’ free cash flow is high, a condition when expropriation is most likely to occur. Our results therefore add credence to recent work casting doubt on the efficacy of Tobin’s Q as a measure of firm performance.

Authors

• Barry Hettler, The College at Brockport - SUNY

• Arno Forst, Kent State University