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Investor Protection and Asset Prices

Author

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  • Suleyman Basak
  • Georgy Chabakauri
  • M Deniz Yavuz

Abstract

Empirical evidence suggests that investor protection significantly affects ownership concentration and asset prices. We develop a dynamic asset pricing model to address the empirical regularities and uncover some of the underlying mechanisms at play. Our model features a controlling shareholder that endogenously accumulates control over a firm, and diverts a fraction of its output. Better investor protection decreases stock holdings of controlling shareholders, increases stock mean returns, and increases stock return volatilities when ownership concentration is sufficiently high, consistent with the related empirical evidence. The model also predicts that better protection increases interest rates and decreases the controlling shareholder’s leverage.Received August 14, 2017; editorial decision January 15, 2019 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Suleyman Basak & Georgy Chabakauri & M Deniz Yavuz, 2019. "Investor Protection and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4905-4946.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:12:p:4905-4946.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz038
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    References listed on IDEAS

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    1. Posner, Richard A, 1997. "Social Norms and the Law: An Economic Approach," American Economic Review, American Economic Association, vol. 87(2), pages 365-369, May.
    2. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    3. Georgy Chabakauri, 2013. "Dynamic Equilibrium with Two Stocks, Heterogeneous Investors, and Portfolio Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 3104-3141.
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    Cited by:

    1. Stoffman, Noah & Woeppel, Michael & Yavuz, M. Deniz, 2022. "Small innovators: No risk, No return," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    2. Jia Yue & Ben-Zhang Yang & Ming-Hui Wang & Nan-Jing Huang, 2019. "Asset Prices with Investor Protection and Past Information," Papers 1911.00281, arXiv.org, revised Apr 2020.
    3. Jia Yue & Ming-Hui Wang & Nan-Jing Huang, 2022. "Global Optimal Consumption–Portfolio Rules with Myopic Preferences and Loss Aversion," Computational Economics, Springer;Society for Computational Economics, vol. 60(4), pages 1427-1455, December.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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