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Agency Costs, Mispricing, and Ownership Structure


  • Sergey Chernenko,

  • C. Fritz Foley,

  • Robin Greenwood

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    • Sergey Chernenko is an Assistant Professor of Finance at the Ohio State University in Columbus, OH. C. Fritz Foley is a Professor at Harvard Business School and Faculty Research Fellow at NBER in Boston, MA. Robin Greenwood is a Professor at Harvard Business School and Faculty Research Fellow at NBER in Boston, MA.

  • We thank Malcolm Baker, Bill Christie (editor), Mihir Desai, Masako Egawa, Alp Ercil, Yasushi Hamao, Sam Hanson, Naoki Kamiyama, David Matsa, David Scharfstein, Andrei Shleifer, Jeremy Stein, Kenji Wada, Lucy White, an anonymous referee, 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 data. Foley and Greenwood thank the Division of Research of the Harvard Business School for financial support.


Standard theories of ownership assume insiders ultimately bear all agency costs and therefore act to minimize conflicts of interest. However, overvalued equity can offset these costs and induce listings associated with higher agency costs. We explore this possibility by examining a sample of public listings of Japanese subsidiaries. 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.