Investor Protection and Interest Group Politics
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Tel Aviv University - Eitan Berglas School of Economics; Boston University - Department of Economics
November 1, 2008
Review of Financial Studies, Vol. 23. No. 3, pp. 1089-1119, 2010
Harvard Law and Economics Discussion Paper No. 603
We model how lobbying by interest groups affects the level of investor protection. In our model, three groups - 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 pushing investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, and 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 that public firms already possess. 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.
Number of Pages in PDF File: 43
Keywords: Investor protection, corporate governance, corporate law, interest groups, political economy, law and finance, insiders, institutional investors, entrepreneurs, equity capital, agency costs, private benefits of control
JEL Classification: D72, G20, G30, K22, O16
Date posted: November 15, 2007 ; Last revised: March 28, 2010
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