Agency Conflicts, Investment, and Asset Pricing
77 Pages Posted: 31 Dec 2004 Last revised: 4 Dec 2018
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