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Agency Conflicts, Investment, and Asset Pricing
Author(s) -
ALBUQUERUE RUI,
WANG NENG
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01309.x
Subject(s) - capital asset pricing model , shareholder , private benefits of control , economics , stock (firearms) , incentive , volatility (finance) , monetary economics , consumption based capital asset pricing model , risk premium , risk free interest rate , financial economics , business , microeconomics , finance , corporate governance , mechanical engineering , engineering
The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q , higher return volatility, larger risk premia, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.