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Agency Conflicts, Investment, and Asset PricingRui A. AlbuquerqueBoston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) Neng WangColumbia Business School - Finance and Economics May 2007 AFA 2006 Boston Meetings Paper ECGI - Finance Working Paper No. 167/2007 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. 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, G34 working papers seriesDate posted: December 31, 2004Suggested CitationContact Information
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