Working Paper: NBER ID: w13251
Authors: Rui Albuquerque; Neng Wang
Abstract: The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q, higher return volatility, larger risk premium, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22 percent, a gain for which outside shareholders are willing to pay 11 percent of their capital stock.
Keywords: agency conflicts; investment; asset pricing
JEL Codes: E44; G1; G3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weaker investor protection (G18) | overinvestment by controlling shareholders (G34) |
| overinvestment by controlling shareholders (G34) | return volatility (G17) |
| weaker investor protection (G18) | return volatility (G17) |
| weaker investor protection (G18) | equity risk premium (G12) |
| return volatility (G17) | equity risk premium (G12) |
| weaker investor protection (G18) | interest rates (E43) |
| equity risk premium (G12) | interest rates (E43) |
| improving investor protection (G18) | stock market valuations (G10) |