Shareholder Protection and the Cost of Capital Empirical Evidence from German and Italian Firms

Julie Elston and Laura Rondi

CERIS Working Paper from CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY

Abstract: We investigate implications for the cost of capital in a model with agency conflicts between inside and outside shareholders, where the severity of agency costs depends on a parameter representing investor protection. Using firm-level data for Italy and Germany we find significant differences in shareholder protection and its implications for the firm’s ownership structure and the cost of capital. Results indicate that concentrated inside ownership increases the cost of capital for Italian firms while having no significant impact on the cost of capital for German firms. Evidence also suggests bank influence in Germany may serve to reduce investor risk for outside shareholders. In contrast, the magnitude of capital stock distortions is found to be quite important in Italy. Overall, slow growth in continental Europe may be more closely linked to institutional differences in shareholder protection between countries rather than inside ownership of firms.

Keywords: Shareholder protection; ownership structure; cost of capital; agency costs; underinvestment (search for similar items in EconPapers)
JEL-codes: D92 E22 G31 G32 O16 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://www.byterfly.eu/islandora/object/librib:351832 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:csc:cerisp:200608

Access Statistics for this paper

More papers in CERIS Working Paper from CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY Contact information at EDIRC.
Bibliographic data for series maintained by Anna Perin () and Giancarlo Birello ().