Investor Protection and Equity-Holdings: An Explanation of Two Puzzles?

Yrjö Koskinen () and Mariassunta Giannetti

No 4017, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a model where wealthy investors have an incentive to become controlling shareholders because they can earn additional benefits by expropriating outside shareholders. As a consequence, in countries where minority investor rights are poorly protected, both domestic and foreign portfolio investors have a disincentive to hold stocks. The model implies that the differences in stock market participation rates across countries and the pervasiveness of home equity bias depend on the degree of investor protection. We provide international evidence on stock market participation rates, and holdings of domestic and foreign stocks consistent with the predictions of the model.

Keywords: Home equity bias; Portfolio choice; Limited participation; Investor protection; Private benefits of control (search for similar items in EconPapers)
JEL-codes: F21 F36 G11 G32 G38 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (6)

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