Investor Protection and Asset Prices
50 Pages Posted: 7 Mar 2016 Last revised: 14 Aug 2018
Date Written: August 1, 2018
Empirical evidence suggests that investor protection has significant effects on ownership concentration and asset prices. We develop a dynamic asset pricing model to address the empirical regularities and uncover the underlying mechanisms at play. Our model features a controlling shareholder who endogenously accumulates control over a firm, and diverts a fraction of its output. In line with empirical evidence, better investor protection decreases stock holdings of controlling shareholders, increases stock mean-returns, and increases stock return volatilities when ownership concentration is sufficiently high. The model also predicts that better protection increases interest rates and decreases leverage.
Keywords: investor protection, asset pricing, controlling shareholders, expropriation, stock holdings
JEL Classification: G12, G32
Suggested Citation: Suggested Citation