Hundred Baggers Insider Ownership

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An attribute common amongst many hundred baggers is strong insider ownership.

Chris Mayer, in his book 100 Baggers: Stocks That Return 100:1 and How to Find Them, writes:

In today’s weird marketplace, the presence of owner-operators can be a signal of a likely value. And as with value, an owner-operator is a predictor of future performance. “Owner-operators, over an extended period of time,” Doyle said, “tend to outpace the broad stock market by a wide margin.”

Considerable academic research has been conducted on the subject of insider ownership and its relationship to share price performance, but the effect remains nonetheless. A 2013 paper titled “CEO Ownership, Stock Market Performance, and Managerial Discretion” saw its authors summarize its findings as such: “We show that investing in firms in which the CEO owns a substantial fraction of shares (for example more than 10% of outstanding shares) leads to large abnormal returns. A strategy based on public information about managerial ownership delivers annual abnormal returns (annual alphas in a Fama-French portfolio setting) of 4 to 10%. These results are stronger for firms in which the impact of the CEO can expected to be large, that is, in firms in which the CEO has a lot of discretion.”

However, there may be an upper limit to the benefits of insider ownership, and a threshold beyond which the results may be negative. A research paper published in 2000 stated: “We find that the level of insider ownership is positively related to stock returns. This result suggests that as managers’ equity ownership increases, their interests coincide more with those of outside shareholders. But we also find that the square of the level of insider ownership is inversely related to stock returns, indicating that excessive insider ownership rather hurts corporate performance probably due to the problems associated with managers’ entrenchment.”

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