Investor Protection, Equity Returns, and Financial Globalization

Posted: 16 Jun 2008 Last revised: 27 Mar 2012

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Yrjo Koskinen

Haskayne School of Business, University of Calgary

Multiple version iconThere are 2 versions of this paper

Date Written: January 19, 2012

Abstract

We study the effects of investor protection on stock returns and portfolio allocation decisions. In our theoretical model, if investor protection is weak, wealthy investors have an incentive to become controlling shareholders. In equilibrium, the stock price reflects the demand from both controlling shareholders and portfolio investors. Due to the high demand from controlling shareholders, the price of weak corporate governance stocks is not low enough to fully discount the extraction of private benefits. Thus, stocks have lower expected returns when investor protection is weak. This has implications for domestic and foreign investors' stockholdings. In particular, we show that portfolio investors' participation in the domestic stock market and home equity bias are positively related to investor protection and provide original evidence in their support.

Keywords: Investor Protection, Corporate Governance, Private Benefits of Control, Stock Returns, Portfolio Choice, Home Equity Bias

JEL Classification: G11, G32, G38, F21, F36

Suggested Citation

Giannetti, Mariassunta and Koskinen, Yrjo J, Investor Protection, Equity Returns, and Financial Globalization (January 19, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1145720

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Yrjo J Koskinen

Haskayne School of Business, University of Calgary ( email )

SH 154, 2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
+1-403-220-5540 (Phone)

HOME PAGE: http://haskayne.ucalgary.ca/haskayne_info/profiles/yrjo-koskinen

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