Working Paper: CEPR ID: DP4017
Authors: Mariassunta Giannetti; Yrj Koskinen
Abstract: We develop a model where wealthy investors have an incentive to become controlling shareholders because they can earn additional benefits by expropriating outside shareholders. As a consequence, in countries where minority investor rights are poorly protected, both domestic and foreign portfolio investors have a disincentive to hold stocks. The model implies that the differences in stock market participation rates across countries and the pervasiveness of home equity bias depend on the degree of investor protection. We provide international evidence on stock market participation rates, and holdings of domestic and foreign stocks consistent with the predictions of the model.
Keywords: home equity bias; investor protection; limited participation; portfolio choice; private benefits of control
JEL Codes: F21; F36; G11; G32; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of investor protection (G18) | Increased control by wealthy investors (G18) |
| Increased control by wealthy investors (G18) | Decreased stock holdings by minority investors (G34) |
| Lack of investor protection (G18) | Decreased stock holdings by minority investors (G34) |
| Lack of investor protection (G18) | Lower stock market participation rates (G19) |
| Increased investor protection (G18) | Higher stock market participation rates (G19) |