"Agency Conflicts, Investment, and Asset Pricing"
©
Journal of Finance,
2008
Volume: 63
|
Issue: 1
|
Pages: 1-40
Publication type: Journal article
Research Archive Topic: Business Economics and Public Policy, Capital Markets and Investments, Corporate Finance, Real Estate
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 premia, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.
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