Insider Ownership and Shareholder Value: Evidence from New Project Announcements ∗

Most firms outside the U.S. have one or more controlling shareholders that man-age multiple firms within a business group structure with very little direct cash flow rights. We employ a novel dataset of new capital investment projects announced by publicly-listed Indian firms to estimate the value implications of such complex owner-ship structures. Focussing on the market’s assessment of the marginal value of new projects enables us to overcome problems associated with employing average Tobin’s q as a value measure. We find that the project announcement returns are significantly larger for projects of group firms with high insider holding as compared to projects of group firms with low insider holding. This effect is larger for projects that result in either the firm or the business group diversifying into a new industry, and for firms with high level of free cash flows. Overall, our results are consistent with business group insiders expropriating outside shareholders by selectively housing more (less) valuable projects in firms with high (low) insider holding. ∗We would like to thank Heitor Almeida and seminar participants at the Olin Business School, America