71 Pages Posted: 31 Dec 2004 Last revised: 7 Jun 2017
Date Written: October 10, 2011
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: 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