Insider Ownership

A lot of value investors place great emphasis on insider ownership. They believe that if management and/or the board of directors are significant shareholders, then the decisions they make will be based on the best interests of all shareholders. They won't, for example, attempt to raise the share price in the short term by engaging in massive share repurchases at a high share price in order to increase the value of their options. They might also be more prudent with capital investments and acquisitions since it is literally their own money they're investing.

But it can also happen that insiders who own significant stakes in the company may not actually have long term share price appreciation as their primary goal. Instead their goal might be simply to fleece the other minority shareholders by taking a bigger piece of the profits for themselves. This could be hidden in various related-party transactions such as leases or consulting fees or exorbitant compensation. It's true that this sort of abuse could be practiced by insiders even if they were not large shareholders, but it's easier to get away with this sort of thing when you're the boss.

I think the best thing would be to judge the past record of a company that has significant insider ownership. If the same owners have been around a while and have done things in the past that have benefited all shareholders, not just themselves, then I would view that as a very positive sign. After all, as psychologists will tell you, the best predictor of future behaviour is past behaviour.

The academic studies looking at firm performance vs. insider ownership are ambiguous. This study from the Journal of Corporate Finance argues that the amount of insider ownership is actually a function of firm performance as well as vice-versa, which just demonstrates how difficult it is to judge whether insider ownership is a good thing or not. The article's appendix includes summaries of past studies done in this area.

Bottom line, insider ownership in and of itself is probably not a bullish indicator while insider ownership combined with a long history of shareholder-friendliness probably IS a bullish indicator.