Investor Protection, Diversification, Investment, and Tobin's Q

46 Pages Posted: 20 Mar 2012 Last revised: 20 Sep 2012

See all articles by Yingcong Lan

Yingcong Lan

Cornerstone Research - New York Office

Neng Wang

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Jinqiang Yang

Shanghai University of Finance and Economics

Date Written: September 19, 2012

Abstract

We develop a dynamic incomplete-markets model where an entrenched insider, facing imperfect investor protection and non-diversifiable illiquid business risk, makes interdependent consumption, portfolio choice, expropriation, corporate investment, ownership, and business exit decisions. Unlike in the frst-best, the insider's tradeoff between under-diversification costs and private benefits leads to the following results: (1) the firm either over- or underinvests, depending on firm size; (2) the insider's private valuation fundamentally differs from diversified investors valuation;(3) conditional CAPM holds for outside equity; (4) the insider demands an additional idiosyncratic risk premium; (5) the exit option and ownership dynamics are important for the insider to manage business risk.

Suggested Citation

Lan, Yingcong and Wang, Neng and Yang, Jinqiang, Investor Protection, Diversification, Investment, and Tobin's Q (September 19, 2012). Available at SSRN: https://ssrn.com/abstract=2024779 or http://dx.doi.org/10.2139/ssrn.2024779

Yingcong Lan

Cornerstone Research - New York Office ( email )

599 Lexington Avenue
New York, NY 10022
United States

Neng Wang (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jinqiang Yang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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