Ownership Concentration and Firm Value: New Evidence from Owner Stakes in IPOs

We study the relationship between ownership concentration and firm value using hand-collected data on the stakes of owner-managers before and after initial public offerings (IPOs). We instrument for the reduction in stake using market returns shortly before IPOs. Short-run market returns are plausible instruments because owners engage in market timing by selling more when prior returns are high, but high short-run returns are unlikely to directly affect firm value years after the IPO. As predicted by agency theory, a large reduction in ownership concentration at the IPO is negatively related to valuation. Future asset growth is low when owners have low stakes.