Working Paper: NBER ID: w13702
Authors: Lucian A. Bebchuk; Zvika Neeman
Abstract: We model how lobbying by interest groups affects the level of investor protection. In our model, insiders in existing public companies, institutional investors (financial intermediaries), and entrepreneurs who plan to take companies public in the future, compete for influence over the politicians setting the level of investor protection. We identify conditions under which this lobbying game has an inefficiently low equilibrium level of investor protection. Factors that operate to reduce investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, as well as the inability of institutional investors to capture the full value that efficient investor protection would produce for outside investors. The interest that entrepreneurs (and existing public firms) have in raising equity capital in the future reduces but does not eliminate the distortions arising from insiders' interest in extracting rents from the capital public firms already have. Our analysis generates testable predictions, and can explain existing empirical evidence, regarding the way in which investor protection varies over time and around the world.
Keywords: Investor protection; Interest group politics; Lobbying; Corporate governance
JEL Codes: D72; G20; G30; K22; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate insiders' lobbying (G38) | Lower level of investor protection (G18) |
| Institutional investors' ineffective lobbying (G23) | Lower level of investor protection (G18) |
| Insiders' private benefits from weaker investor protection (G34) | Corporate insiders' lobbying (G38) |
| Entrepreneurs' presence in lobbying game (L26) | Moderation of bias towards private benefits (H42) |
| Lobbying dynamics (D72) | Inefficiently low level of investor protection (G18) |
| Insiders' lobbying (D72) | Excessively high private benefits for insiders (G34) |
| Insufficient representation of public investors' interests (G38) | Lower level of investor protection (G18) |