NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Agency Costs, Mispricing, and Ownership Structure

Sergey Chernenko, C. Fritz Foley, Robin Greenwood

NBER Working Paper No. 15910
Issued in April 2010
NBER Program(s):   CF

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.

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Document Object Identifier (DOI): 10.3386/w15910

Published: With Sergey Chernenko and Robin Greenwood, “A gency Costs, Mispricing, and Ownership Structure,” Financial Management Vol. 41, No. 4, pp. 885-914, 2012.

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