Investor Protection and Asset Prices

50 Pages Posted: 7 Mar 2016 Last revised: 14 Aug 2018

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: August 1, 2018

Abstract

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

Basak, Suleyman and Chabakauri, Georgy and Yavuz, M. Deniz, Investor Protection and Asset Prices (August 1, 2018). 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)

London
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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