Property Rights and the Cost of Capital

Per-Olof Bjuggren () and Johan Eklund ()

No 2012:12, Working Papers from Swedish Entrepreneurship Forum

Abstract: In countries with more secure property rights, the cost of capital is lower, suggesting higher investment rates. Using data from 49 countries we extend the conventional capital-asset pricing model (CAPM) to include a property rights risk-factor. In the conventional CAPM model only a single risk factor – systemic risk – is considered. However, when using a world market portfolio to estimate systemic risk in national portfolios, little of the required rate of return is explained in less developed as compared to more developed countries. Adding a factor representing institutional risk increases predictive power substantially. Further, we find that property rights affect the transmission of information, which suggests that markets price information differently, and allocate resources less efficiently, in countries with less secure property rights. We find that the CAPM model performs better in countries with more secure property rights.

Keywords: Asset pricing; International financial markets; Property rights; Cost of capital; Investment. (search for similar items in EconPapers)
JEL-codes: G12 G15 G38 N20 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2012-09-01
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Journal Article: Property rights and the cost of capital (2015)
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