Investor Protection and Interest Group Politics

43 Pages Posted: 15 Nov 2007 Last revised: 28 Mar 2010

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics; Boston University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2008

Abstract

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.

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

Suggested Citation

Bebchuk, Lucian A. and Neeman, Zvika, Investor Protection and Interest Group Politics (November 1, 2008). Harvard Law and Economics Discussion Paper No. 603; Review of Financial Studies, Vol. 23. No. 3, pp. 1089-1119, 2010; Harvard Law and Economics Discussion Paper No. 603. Available at SSRN: https://ssrn.com/abstract=1030355

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

HOME PAGE: http://www.tau.ac.il/~zvika/

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-3184 (Phone)
617-353-4449 (Fax)

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