Working Paper: NBER ID: w15910
Authors: Sergey Chernenko; C. Fritz Foley; Robin Greenwood
Abstract: Standard theories of corporate ownership assume that because markets are efficient, insiders ultimately bear agency costs and therefore have a strong incentive to minimize conflicts of interest with outside investors. We show that if equity is overvalued, however, mispricing offsets agency costs and can induce a controlling shareholder to list equity. Higher valuations support listings associated with greater agency costs. We test the predictions that follow from this idea on a sample of publicly listed corporate subsidiaries in Japan. When there is greater scope for expropriation by the parent firm, minority shareholders fare poorly after listing. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced.
Keywords: agency costs; mispricing; ownership structure; corporate governance
JEL Codes: G14; G3; G32; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mispricing (D49) | incentive to sell equity (G12) |
| larger share of equity sold (G34) | lower stock market returns post-listing (G12) |
| greater scope for agency problems (G34) | more overvalued equity (G19) |
| correction of mispricing (G19) | repurchase of subsidiaries at discounts (G34) |