Investor Protection and Asset Prices
37 Pages Posted: 7 Mar 2016 Last revised: 15 Aug 2017
Date Written: August 2017
Empirical evidence suggests that investor protection affects asset prices. We develop a dynamic asset pricing model to shed light on the empirical regularities and underlying mechanisms at play. Our model features a controlling shareholder who can divert a fraction of the firm's output. The controlling shareholder's power over the firm is endogenous and interacts with investor protection in determining the level of expropriation. In equilibrium, imperfect investor protection implies higher stock holdings by controlling shareholders, lower stock returns, higher stock return volatilities and lower interest rates.
Keywords: investor protection, asset pricing, controlling shareholders, expropriation, stock holdings
JEL Classification: G12, G32
Suggested Citation: Suggested Citation