Prior studies document the systematic tendency for firms with low price to earnings ratios (LPE) to earn higher stock returns and firms with high price to earnings ratios (HPE) to earn lower stock returns, in both the United States and in international markets (Campbell & Shiller, 2001; Capaul, Rowley, & Sharpe, 1993; Fama & French, 2002). In this study, we provide evidence that suggests insider ownership alters this relation. That is, when insider ownership is high, companies with low (high) price to earnings ratios earn lower (higher) stock returns. Similar results are obtained for operating performance; in the year following valuation, earnings decrease for high insider ownership-low price to earnings (HIO-LPE) firms and increase for high insider ownership-high price to earnings (HIO-HPE) firms.
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