Post edited 4:36 am – December 7, 2010 by Collin
I recently came across an article about Walmart, stating that the insider ownership is 45%! So I began my journey of thoughts about the importance of insider ownership.
Think about it. If you are the CEO of a company with a lot of cash and that you own 0 shares in the company, what would you do with the cash (Assuming the stockholders are pressing you to use the cash)? There are a few choices.
Choice A: you can use the cash to do value-creation acquisition.
Choice B: you can use the cash to do value-destruction acquisition, however, the revenue, cash flow etc will increase therefore increasing your paycheck & ego of owning a bigger company.
Choice C: return the cash to shareholders in the form of special dividends or share repurchase. remember you own 0 shares as such you will not benefit, as a matter of fact, your paycheck & ego might even drop because of a decrease cash resulting in a lower market capitalization.
Many will choose A. For the sake of this example, let's say that you cant find any value-creating acquisition and the shareholders are pressing you harder for your intention for the cash.
Now think about this: How many CEOs out there will be choosing choice C if their (shares) stake is close to nil? My answer? Probably a few, but a majority of them will be using the cash to expand for the sake of expanding, thus destroying shareholder value.
I believe greater value should be given to companies with high insider ownership.
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