Expropriation Risk by Block Holders, Institutional Quality and Expected Stock Returns
63 Pages Posted: 22 Jan 2016 Last revised: 2 May 2017
Date Written: May 1, 2017
Abstract
We study the asset pricing implications arising from imperfect investor protection using a new governance measure. This is defined as the product of institutional quality in a country and the proportion of free float shares, which captures the impact of controlling block holders. Using monthly returns of 4,756 blue chip firms from 50 international equity markets for 13 years, we show through tests of variants of the augmented-CAPM, that a two factor CAPM augmented with a factor mimicking portfolio based on our new investor protection metric yields the highest explanatory power, especially for markets that exhibit true variation in ownership types
Keywords: Investor Protection, Legal Origin, Asset pricing, International Financial Markets
JEL Classification: G11, G12, G15, O55
Suggested Citation: Suggested Citation