Agency Conflicts, Investment, and Asset Pricing

Neng Wang and Rui Albuquerque

No 351, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: Corporations in most countries are run by controlling shareholders whose cash flow rights are substantially smaller than their control rights in the firm. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of outside minority investors by diverting resources away from the firm and distorting corporate investment and payout policies. We develop a dynamic stochastic general equilibrium asset pricing model that acknowledges the implications of agency conflicts through imperfect investor protection on security prices. We show that countries with weaker investor protection have more overinvestment, lower market-to-book equity values, larger expected equity returns and return volatility, higher dividend yields, and higher interest rates. These predictions are consistent with empirical findings. We develop new predictions: countries with high investment-capital ratios have both higher variance of GDP growth and higher variance of stock returns. We provide evidence consistent with these hypotheses. Finally, we show that weak investor protection causes significant wealth redistribution from outside shareholders to controlling shareholders

Keywords: investment; asset pricing; investor protection (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-bec, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://repec.org/sce2005/up.11018.1107197204.pdf (application/pdf)

Related works:
Journal Article: Agency Conflicts, Investment, and Asset Pricing (2008)
Working Paper: Agency Conflicts, Investment, and Asset Pricing (2007)
Working Paper: Agency Conflicts, Investment and Asset Pricing (2005)
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:sce:scecf5:351

Access Statistics for this paper

More papers in Computing in Economics and Finance 2005 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum (baum@bc.edu).