We develop a model where wealthy investors have an incentive to become controlling shareholders because they can earn additional benefits by expropriating outside shareholders. As a consequence, in countries where minority investor rights are poorly protected, both domestic and foreign portfolio investors have a disincentive to hold stocks. The model implies that the differences in stock market participation rates across countries and the pervasiveness of home equity bias depend on the degree of investor protection. We provide international evidence on stock market participation rates, and holdings of domestic and foreign stocks consistent with the predictions of the model.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4017.
Find related papers by JEL classification: F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
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