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Institutions, Corporate Governance and Capital Flows

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Abstract

Countries with weaker domestic institutions hold fewer foreign assets and exhibit concentrated corporate ownership. An equilibrium business cycle model of international capital ows with corporate governance frictions between outside investors and insiders explains both phenomena. Investment dynamics under insider control leads relative dividend and labor income for outsiders to be more negatively correlated in countries with weaker institutions. Consequently, outsiders hold more domestic assets to hedge labor income risk. I provide empirical evidence on this hedging demand. Concentrated ownership arises because international diversi cation through the sale of domestic assets by insiders is penalized by lower stock market valuation.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 10-2013.

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Length: 54 pages
Date of creation: 21 May 2013
Date of revision:
Handle: RePEc:gii:giihei:heidwp10-2013

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Keywords: Home bias; institutional quality; corporate governance;

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