Investor Protection and Asset Prices

36 Pages Posted: 7 Mar 2016  

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Georgy Chabakauri

London School of Economics and Political Science

M. Deniz Yavuz

Purdue University - Krannert School of Management

Date Written: March 6, 2016

Abstract

There is substantial empirical evidence that investor protection affects stock returns, volatilities and interest rates. 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

Basak, Suleyman and Chabakauri, Georgy and Yavuz, M. Deniz, Investor Protection and Asset Prices (March 6, 2016). Available at SSRN: https://ssrn.com/abstract=2742961 or http://dx.doi.org/10.2139/ssrn.2742961

Suleyman Basak

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Georgy Chabakauri (Contact Author)

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/CHABAKAU/

M. Deniz Yavuz

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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