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Property Rights and the Cost of Capital

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Author Info

  • Bjuggren, Per-Olof

    (Jönköping International Business School and Ratio Institute)

  • Eklund, Johan

    ()
    (Swedish Entrepreneurship Forum)

Abstract

In countries with more secure property rights, the cost of capital is lower, suggesting higher investment rates. Using data from 49 countries we extend the conventional capital-asset pricing model (CAPM) to include a property rights risk-factor. In the conventional CAPM model only a single risk factor – systemic risk – is considered. However, when using a world market portfolio to estimate systemic risk in national portfolios, little of the required rate of return is explained in less developed as compared to more developed countries. Adding a factor representing institutional risk increases predictive power substantially. Further, we find that property rights affect the transmission of information, which suggests that markets price information differently, and allocate resources less efficiently, in countries with less secure property rights. We find that the CAPM model performs better in countries with more secure property rights.

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Bibliographic Info

Paper provided by Swedish Entrepreneurship Forum in its series Working Papers with number 2012:12.

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Length: 21 pages
Date of creation: 01 Sep 2012
Date of revision:
Handle: RePEc:hhs:entfor:2012_012

Contact details of provider:
Postal: Swedish Entrepreneurship Forum, Örebro University, SE-70182 ÖREBRO, Sweden
Web page: http://www.oru.se/Institutioner/Handelshogskolan-vid-Orebro-universitet/

Related research

Keywords: Asset pricing; International financial markets; Property rights; Cost of capital; Investment.;

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