Agency Conflicts, Investment, and Asset Pricing

77 Pages Posted: 31 Dec 2004 Last revised: 4 Dec 2018

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Neng Wang

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 10, 2011

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 making investor protection perfect increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.

Keywords: Asset prices, heterogeneous agents, agency, corporate governance, investor protection, volatility, overinvestment

JEL Classification: G12, G31, G32, G34

Suggested Citation

Albuquerque, Rui A. and Wang, Neng, Agency Conflicts, Investment, and Asset Pricing (October 10, 2011). Journal of Finance, Vol. 63, 2008, Boston University Questrom School of Business Research Paper No. 2009-3, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 167/2007, Available at SSRN: https://ssrn.com/abstract=637303 or http://dx.doi.org/10.2139/ssrn.637303

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

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Neng Wang

Columbia University - Columbia Business School, Finance ( email )

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