Agency Conflicts, Investment, and Asset Pricing

Agency Conflicts, Investment, and Asset Pricing

Rui Albuquerque, Neng Wang

Series number :

Serial Number: 
167/2007

Date posted :

May 01 2007

Last revised :

December 06 2018
SSRN Share

Keywords

  • asset prices • 
  • heterogeneous agents • 
  • agency • 
  • Corporate governance • 
  • investor protection • 
  • volatility • 
  • overinvestment

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 premium, and higher interest rate. Calibrating the model to the Korean economy reveals that making investor protection perfect increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.

Published in

Published in: 
Publication Title: 
Journal of Finance
Description: 
Volume 63, Issue1, February 2008, Pages 1-40

Authors

Real name: 
Neng Wang