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Agency Costs, Mispricing, and Ownership Structure

In: Business and Management

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Agency Costs, Mispricing, and Ownership Structure*
Sergey Chernenko Ohio State University C. Fritz Foley Harvard Business School and NBER Robin Greenwood Harvard Business School and NBER

March 2012

Abstract Standard theories of corporate ownership assume that because markets are efficient, insiders ultimately bear all agency costs that they create and therefore have a strong incentive to minimize conflicts of interest with outside investors. We argue that if equity is overvalued, however, mispricing offsets agency costs and can induce a controlling shareholder to list equity. Higher valuations may support listings associated with greater agency costs. We test the predictions that follow from this idea on a sample of publicly listed subsidiaries in Japan. Subsidiaries in which the parent sells a larger stake and subsidiaries with greater scope for expropriation by the parent firm are more overpriced at listing, and minority shareholders fare poorly after listing as mispricing corrects. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced.

*

We thank Malcolm Baker, Mihir Desai, Masako Egawa, Alp Ercil, Yasushi Hamao, Sam Hanson, Naoki Kamiyama, David Matsa, David Scharfstein, Andrei Shleifer, Jeremy Stein, Kenji Wada, Lucy White, and seminar participants at Georgetown, Harvard, IESE, the NBER Japan program, the NBER Law and Economics Program, and Washington University in St. Louis for helpful comments. We also thank Jim Quinn, John Ng, and Sonya Lai for research assistance and Masako Egawa, Alp Ercil, Lydia Petersen, Naoki Kamiyama, Daiwa Institute of Research Ltd., Toyo Keizai Inc., and the Sandra Ann Moreilli Pacific-Basin Capital Markets Research Center for help assembling...

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