Investment, protection, ownership, and the cost of capital

Charles P. Himmelberg (), R. Glenn Hubbard and Inessa Love
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Charles P. Himmelberg: Columbia University
R. Glenn Hubbard: Columbia University

No 25, Working Paper Research from National Bank of Belgium

Abstract: We investigate the cost of capital in a model with an agency conflict between inside managers and outside shareholders. Inside ownership reflects the classic tradeoff between incentives and risk diversification, and the severity of agency costs depends on a parameter representing investor protection. In equilibrium, the marginal cost of capital is a weighted average of terms reflecting both idiosyncratic and systematic risk, and weaker investor protection increases the weight on idiosyncratic risk. Using firm-level data from 38 countries, we estimate the predicted relationships among investor protection, inside ownership, and the marginal cost of capital. We discuss implications for the determinants of firm size, the relationship between Tobin's Q and ownership, and the effect of financial liberalizations.

Keywords: Investor protection; ownership; investment; cost of capital; agency costs (search for similar items in EconPapers)
JEL-codes: D92 E22 G31 G32 O16 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2002-05
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Citations: View citations in EconPapers (34)

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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:200205-6

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