The causal relationship between insider ownership and market valuation is tested by
simultaneous estimation of the causes and effect of insider ownership among the largest
continental European companies. Controlling for nation and industry effects insider
ownership (measured by the fraction of "closely held" shares) is found to have a positive
effect on market valuation (market-to-book values). And market valuation is found to have a
positive feedback effect on the level of insider ownership. The findings provide empirical
support for a theoretical model proposed by La Porta et al (1999). But the results are also
found to be sensitive to owner identity: while a higher level of financial and corporate insider
ownership is found to increase market valuation, family ownership has no significant effect,
and a higher level of government ownership is found to reduce market valuation.