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Agency Conflicts, Investment, and Asset Pricing

71 Pages Posted: 31 Dec 2004 Last revised: 7 Jun 2017

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Neng Wang

Columbia Business School - Finance and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: October 10, 2011

Abstract

The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q, higher return volatility, larger risk premium, and higher interest rate. Calibrating the model to the Korean economy reveals that making investor protection perfect increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.

Keywords: Asset prices, heterogeneous agents, agency, corporate governance, investor protection, volatility, overinvestment

JEL Classification: G12, G31, G32, G34

Suggested Citation

Albuquerque, Rui A. and Wang, Neng, Agency Conflicts, Investment, and Asset Pricing (October 10, 2011). Journal of Finance, Vol. 63, 2008; Boston University Questrom School of Business Research Paper No. 2009-3; ECGI - Finance Working Paper No. 167/2007. Available at SSRN: https://ssrn.com/abstract=637303 or http://dx.doi.org/10.2139/ssrn.637303

Rui Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Neng Wang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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