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Investor Protection and Interest Group Politics

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  • Lucian A. Bebchuk
  • Zvika Neeman

Abstract

We model how three groups--insiders in existing public companies, institutional investors, and entrepreneurs planning to take firms public--compete for influence over politicians setting the level of investor protection. We identify factors that push toward suboptimal investor protection, including corporate insiders' ability to use public firms' assets to influence politicians, and institutional investors' inability to capture fully the value of investor protection for outside investors. Entrepreneurs and public firms' interest in raising equity capital does not fully eliminate the distortions arising from insiders seeking to extract rents from capital in place. Our analysis produces many testable predictions concerning how investor protection varies over time and around the world. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 23 (2010)
Issue (Month): 3 (March)
Pages: 1089-1119

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Handle: RePEc:oup:rfinst:v:23:y:2010:i:3:p:1089-1119

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References

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  1. Haidar, Jamal Ibrahim, 2009. "Investor protections and economic growth," Economics Letters, Elsevier, vol. 103(1), pages 1-4, April.
  2. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, American Finance Association, vol. 61(6), pages 2597-2635, December.
  3. René M. Stulz, 2005. "The Limits of Financial Globalization," Journal of Finance, American Finance Association, American Finance Association, vol. 60(4), pages 1595-1638, 08.
  4. Gene M. Grossman & Elhanan Helpman, 1992. "Protection For Sale," NBER Working Papers 4149, National Bureau of Economic Research, Inc.
  5. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, American Finance Association, vol. 55(2), pages 867-891, 04.
  6. Alexander Dyck & Natalya Volchkova & Luigi Zingales, 2006. "The Corporate Governance Role of the Media: Evidence from Russia," NBER Working Papers 12525, National Bureau of Economic Research, Inc.
  7. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(3), pages 1131-1175, August.
  8. Reese, William Jr. & Weisbach, Michael S., 2002. "Protection of minority shareholder interests, cross-listings in the United States, and subsequent equity offerings," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(1), pages 65-104, October.
  9. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(2), pages 265-86, April.
  10. Zhihao Yu, 2005. "Environmental Protection: A Theory of Direct and Indirect Competition for Political Influence," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 269-286.
  11. Besley, Timothy & Coate, Stephen, 2001. "Lobbying and Welfare in a Representative Democracy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(1), pages 67-82, January.
  12. Alexander Dyck & Luigi Zingales, 2004. "Private Benefits of Control: An International Comparison," Journal of Finance, American Finance Association, American Finance Association, vol. 59(2), pages 537-600, 04.
  13. Nicolas Marceau & Michael Smart, 2003. "Corporate Lobbying and Commitment Failure in Capital Taxation," American Economic Review, American Economic Association, vol. 93(1), pages 241-251, March.
  14. Bongini, Paola & Claessens, Stijn & Ferri, Giovanni, 2000. "The political economy of distress in East Asian financial institutions," Policy Research Working Paper Series 2265, The World Bank.
  15. Zhihao Yu, 2003. "Environmental Protection: A Theory of Direct and Indirect Competition for Political Influence," Carleton Economic Papers 03-07, Carleton University, Department of Economics, revised Jan 2005.
  16. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(1), pages 1-31, February.
  17. Kathy Fogel, 2006. "Oligarchic family control, social economic outcomes, and the quality of government," Journal of International Business Studies, Palgrave Macmillan, vol. 37(5), pages 603-622, September.
  18. repec:bla:restud:v:72:y:2005:i:1:p:269-286 is not listed on IDEAS
  19. Leuz, Christian & Oberholzer-Gee, Felix, 2006. "Political relationships, global financing, and corporate transparency: Evidence from Indonesia," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(2), pages 411-439, August.
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Cited by:
  1. Miletkov, Mihail & Wintoki, M. Babajide, 2012. "Financial development and the evolution of property rights and legal institutions," Emerging Markets Review, Elsevier, Elsevier, vol. 13(4), pages 650-673.
  2. Matsuoka, Tarishi & Naito, Katsuyuki & Nishida, Keigo, 2013. "The Politics of Financial Development and Capital Accumulation," MPRA Paper 50181, University Library of Munich, Germany.
  3. Douhan, Robin & Norbäck, Pehr-Johan & Persson, Lars, 2009. "Entrepreneurial Innovations, Entrepreneurship Policy and Globalization," Working Paper Series, Research Institute of Industrial Economics 807, Research Institute of Industrial Economics, revised 23 Jul 2013.
  4. Lohse, Tim & Pascalau, Razvan & Thomann, Christian, 2014. "Public Enforcement of Securities Market Rules: Resource-based evidence from the Securities Exchange Commission," Working Paper Series in Economics and Institutions of Innovation, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies 364, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  5. Enrico Perotti & Marcel Vorage, 2010. "Bank Ownership and Financial Stability," Tinbergen Institute Discussion Papers 10-022/2, Tinbergen Institute, revised 11 Sep 2010.
  6. Lucian A. Bebchuk & Michael S. Weisbach, 2010. "The State of Corporate Governance Research," NBER Chapters, in: Corporate Governance National Bureau of Economic Research, Inc.
  7. Carsten Gerner-Beuerle, 2014. "Determinants of corporate governance codes," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 55828, London School of Economics and Political Science, LSE Library.

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