Investor Protection, Ownership, and the Cost of Capital
The authors combine the agency theory of the firm with risk diversification incentives for insiders. Principal-agent problems between insiders and outsiders force insiders to retain a larger share in their firm than they would under a perfect risk...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/04/1783726/investor-protection-ownership-cost-capital http://hdl.handle.net/10986/14288 |
| Summary: | The authors combine the agency theory of
the firm with risk diversification incentives for insiders.
Principal-agent problems between insiders and outsiders
force insiders to retain a larger share in their firm than
they would under a perfect risk diversification strategy.
The authors predict that this higher share of insider
ownership and the resulting exposure of insiders to higher
idiosyncratic risk will result in underinvestment and higher
cost of capital. Using firm-level data from 38 countries,
the authors provide evidence in support of their theoretical
model, showing that the premium for bearing idiosyncratic
risk varies between zero and six percent and decreases in
the level of outside investor protection. The results of the
study imply that policies aimed at strengthening investor
protection laws and their enforcement will improve capital
allocation and result in higher growth. |
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