Agency Conflicts, Investment and Asset Pricing

62 Pages Posted: 27 Jul 2005

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Neng Wang

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2005

Abstract

Corporations in most countries are run by controlling shareholders whose cash flow rights are substantially smaller than their control rights in the firm. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of outside minority investors by diverting resources away from the firm and distorting corporate investment and payout policies. We develop a dynamic stochastic general equilibrium asset-pricing model that acknowledges the implications of agency conflicts through imperfect investor protection on security prices. We show that countries with weaker investor protection have more overinvestment, lower market-to-book equity values, larger expected equity returns and return volatility, higher dividend yields, and higher interest rates. These predictions are consistent with empirical findings. We develop new predictions: countries with high investment-capital ratios have both higher variance of GDP growth and higher variance of stock returns. We provide evidence consistent with these hypotheses. Finally, we show that weak investor protection causes significant wealth redistribution from outside shareholders to controlling shareholders.

Keywords: Asset prices, heterogeneous agents, agency, corporate governance, investor protection, volatility, overinvestment

JEL Classification: G12, G31, G32, G34

Suggested Citation

Albuquerque, Rui A. and Wang, Neng, Agency Conflicts, Investment and Asset Pricing (March 2005). CEPR Discussion Paper No. 4955, Available at SSRN: https://ssrn.com/abstract=770226

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

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Centre for Economic Policy Research (CEPR)

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Neng Wang

Columbia University - Columbia Business School, Finance ( email )

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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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