Working Paper: CEPR ID: DP13472
Authors: Suleyman Basak; Georgy Chabakauri; M. Deniz Yavuz
Abstract: Empirical evidence suggests that investor protection has significant effects on ownership concentration and asset prices. We develop a dynamic asset pricing model to address the empirical regularities and uncover some of the underlying mechanisms at play. Our model features a controlling shareholder who endogenously accumulates control over a firm and diverts a fraction of its output. Better investor protection decreases stock holdings of controlling shareholders, increases stock mean-returns, and increases stock return volatilities when ownership concentration is sufficiently high, consistent with the related empirical evidence. The model also predicts that better protection increases interest rates and decreases the controlling shareholder’s leverage.
Keywords: Investor Protection; Asset Pricing; Controlling Shareholders; Expropriation; Stock Holdings
JEL Codes: G12; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Better investor protection (P) (G18) | Stock holdings of controlling shareholders (C) (G34) |
| Better investor protection (P) (G18) | Stock mean returns (M) (G17) |
| Better investor protection (P) (G18) | Stock return volatilities (V) (G17) |
| Better investor protection (P) (G18) | Interest rates (R) (E43) |
| Better investor protection (P) (G18) | Controlling shareholder's leverage (L) (G32) |