Agency Conflicts, Investment, and Asset Pricing
Rui A. Albuquerque
Boston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Columbia Business School - Finance and Economics
October 10, 2011
Journal of Finance, Vol. 63, 2008
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.
Number of Pages in PDF File: 71
Keywords: Asset prices, heterogeneous agents, agency, corporate governance, investor protection, volatility, overinvestment
JEL Classification: G12, G31, G32, G34
Date posted: December 31, 2004 ; Last revised: December 28, 2014
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