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
AFA 2006 Boston Meetings Paper
ECGI - Finance Working Paper No. 167/2007
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. 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, consistent with empirical evidence. Calibrating the model to the Korean economy reveals that making investor protection perfect increases the stock market value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stocks.
Number of Pages in PDF File: 75
Keywords: Asset prices, heterogeneous agents, agency, corporate governance, investor protection, volatility, overinvestment
JEL Classification: G12, G31, G32, G34working papers series
Date posted: December 31, 2004
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