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Investor Protection and Interest Group Politics

In: Corporate Governance

  • Lucian A. Bebchuk
  • Zvika Neeman

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:, Oxford University Press.

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This chapter was published in:
  • Michael Weisbach, 2010. "Corporate Governance," NBER Books, National Bureau of Economic Research, Inc, number weis10-1, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12190.
    Handle: RePEc:nbr:nberch:12190
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September.
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    5. 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.
    6. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February.
    7. Alexander Dyck & Luigi Zingales, 2004. "Private Benefits of Control: An International Comparison," Journal of Finance, American Finance Association, vol. 59(2), pages 537-600, 04.
    8. René M. Stulz, 2005. "The Limits of Financial Globalization," Journal of Finance, American Finance Association, vol. 60(4), pages 1595-1638, 08.
    9. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 265-86, April.
    10. 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, vol. 66(1), pages 65-104, October.
    11. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, vol. 61(6), pages 2597-2635, December.
    12. 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.
    13. 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.
    14. Jamal Ibrahim Haidar, . "Investor Protections and Economic Growth," Working Paper 304811, Harvard University OpenScholar.
    15. Leuz, Christian & Oberholzer-Gee, Felix, 2006. "Political relationships, global financing, and corporate transparency: Evidence from Indonesia," Journal of Financial Economics, Elsevier, vol. 81(2), pages 411-439, August.
    16. 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, vol. 55(2), pages 867-891, 04.
    17. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1131-1175, August.
    18. 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.
    19. Besley, Timothy & Coate, Stephen, 2001. "Lobbying and Welfare in a Representative Democracy," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 67-82, January.
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