Investor Protection and Equity Markets

Abstract

Although recent research has focused on specificaspects of legal environments with weak shareholder protection, a marketequilibrium model of corporate finance in such environments has yet to bedeveloped.The purpose of the proposed model is to show how theentrepreneur's decisions on the size of the project and the amount of cash flowto sell are shaped by the legal environment; more specifically, it is a modelof the entrepreneur's choice to go public in spite of poor legal protection ofoutside shareholders. It also embeds the decision to go public into a marketequilibrium, which allows us to consider the determination of the size of thecapital market.The model yields a number of predictions and yieldsresults that satisfy those predictions: firms are larger, more valuable andmore plentiful, dividends are higher (and shareholder expropriation lower),ownership concentration is lower, and stock markets are more developed incountries with better protection of shareholders. (SAA)

Keywords: Public offerings, Initial public offerings (IPO), Shareholders, Legal protection, Management decisions