Empirical evidence suggests that investor protection has significant effects on ownership concentration and asset prices. We develop a dynamic asset pricing model to address the empirical regularities and uncover the underlying mechanisms at play. Our model features a controlling shareholder who endogenously accumulates control over a firm, and diverts a fraction of its output. In line with empirical evidence, better investor protection decreases stock holdings of controlling shareholders, increases stock mean-returns, and increases stock return volatilities when ownership concentration is sufficiently high. The model also predicts that better protection increases interest rates and decreases leverage.
Financial Markets Group Discussion Papers DP 779
Paul Woolley Centre Discussion Papers No 60