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Property Rights and the Cost of Capital

Listed author(s):
  • Bjuggren, Per-Olof

    (Jönköping International Business School and Ratio Institute)

  • Eklund, Johan

    ()

    (Swedish Entrepreneurship Forum)

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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File URL: http://entreprenorskapsforum.se/wp-content/uploads/2013/03/WP_12.pdf
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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
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/

References listed on IDEAS
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  1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
  2. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," American Economic Review, American Economic Association, vol. 92(5), pages 1335-1356, December.
  3. Stijn Claessens & Luc Laeven, 2003. "Financial Development, Property Rights, and Growth," Journal of Finance, American Finance Association, vol. 58(6), pages 2401-2436, December.
  4. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
  5. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
  6. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
  7. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
  8. Oliver E. Williamson, 2000. "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 595-613, September.
  9. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
  10. repec:hrv:faseco:30728041 is not listed on IDEAS
  11. Gugler, Klaus & Mueller, Dennis C & Yurtoglu, B Burcin, 2004. "Corporate Governance and the Returns on Investment," Journal of Law and Economics, University of Chicago Press, vol. 47(2), pages 589-633, October.
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