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Investor Protection and Interest Group Politics

  • Lucian A. Bebchuk
  • Zvika Neeman

We model how lobbying by interest groups affects the level of investor protection. In our model, insiders in existing public companies, institutional investors (financial intermediaries), and entrepreneurs who plan to take companies public in the future, compete for influence over the politicians setting the level of investor protection. We identify conditions under which this lobbying game has an inefficiently low equilibrium level of investor protection. Factors that operate to reduce investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, as well as the inability of institutional investors to capture the full value that efficient investor protection would produce for outside investors. The interest that entrepreneurs (and existing public firms) have in raising equity capital in the future reduces but does not eliminate the distortions arising from insiders' interest in extracting rents from the capital public firms already have. Our analysis generates testable predictions, and can explain existing empirical evidence, regarding the way in which investor protection varies over time and around the world.

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File URL: http://www.nber.org/papers/w13702.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13702.

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Date of creation: Dec 2007
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Publication status: published as Lucian A. Bebchuk & Zvika Neeman, 2010. "Investor Protection and Interest Group Politics," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1089-1119, March.
Handle: RePEc:nbr:nberwo:13702
Note: CF LE PE POL
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  1. 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.
  2. Dyck, Alexander & Zingales, Luigi, 2002. "Private Benefits of Control: An International Comparison," CEPR Discussion Papers 3177, C.E.P.R. Discussion Papers.
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  12. repec:bla:restud:v:72:y:2005:i:1:p:269-286 is not listed on IDEAS
  13. 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.
  14. René M. Stulz, 2007. "The Limits of Financial Globalization," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 8-15.
  15. Haidar, Jamal Ibrahim, 2009. "Investor protections and economic growth," Economics Letters, Elsevier, vol. 103(1), pages 1-4, April.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
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