Agency Conflicts, Investment and Asset Pricing

Rui Albuquerque () and Neng Wang ()

No 4955, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Corporations in many countries are run by controlling shareholders whose cash flow rights in the firm are substantially smaller than their control rights. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of minority investors by diverting resources away from the firm and distorting corporate investment and payout policies. We develop a dynamic general equilibrium model to study the asset pricing and welfare implications of imperfect investor protection. 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, consistent with existing empirical evidence. We show that weak investor protection causes significant wealth redistribution from outside shareholders to controlling shareholders. Finally, we provide evidence consistent with our model’s two new predictions: countries with higher investment-capital ratios have both larger variance of GDP growth and larger variance of stock returns.

Keywords: agency conflicts; asset pricing; investment specific technological change; investor protection; overinvestment (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 G34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2005-03
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Related works:
Working Paper: Agency Conflicts, Investment, and Asset Pricing (2007)
Working Paper: Agency Conflicts, Investment, and Asset Pricing (2005)
Journal Article: Agency Conflicts, Investment, and Asset Pricing (2008)
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