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...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, D.C.
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2002/04/1783726/investor-protection-ownership-cost-capital http://hdl.handle.net/10986/14288 |
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okr-10986-142882021-04-23T14:03:20Z Investor Protection, Ownership, and the Cost of Capital Himmelberg, Charles P. Hubbard, R. Glenn Love, Inessa INVESTOR PROTECTION OWNERSHIP COST OF CAPITAL AGENCY CONCEPT RISK DIVERSIFICATION INCENTIVES ACCOUNTING AGENCY PROBLEMS BALANCE SHEET BENCHMARK BOOK VALUE CAPITAL EXPENDITURES CAPITAL MARKETS CAPITAL PROJECTS CD CONTRACT ENFORCEMENT CONTROL TRANSACTIONS CORPORATE FINANCE COST OF CAPITAL COUNTRY COMPARISONS DEBT DEMAND CURVE DIVESTITURES DIVIDENDS ECONOMIC GROWTH ECONOMIC REFORMS EMPIRICAL EVIDENCE EQUILIBRIUM EXCISE TAXES EXPECTED UTILITY EXPENDITURES FEDERAL RESERVE BANK OF NEW YORK FINANCIAL DATA FINANCIAL MARKETS FIXED CAPITAL FOREIGN FIRMS FOREIGN INVESTORS INCOME INVESTOR PROTECTION LAWS LEGAL PROTECTION LEGAL REGIMES LIQUIDITY MARGINAL COST MARGINAL COSTS MARGINAL PRODUCT MARGINAL UTILITY MARGINAL VALUE MERGERS MONETARY POLICY MORAL HAZARD OPPORTUNITY COST OWNERSHIP STRUCTURE PAYOUT PENALTIES PORTFOLIO PREDICTIONS PRICE ELASTICITY PRICE ELASTICITY OF DEMAND PRODUCTION FUNCTION PRODUCTION TECHNOLOGY PROFITABILITY PROPRIETORSHIP PURCHASE PRICE RATIONAL EXPECTATIONS REORGANIZATION RESEARCH AGENDA RISK AVERSION RISK PREMIUM SHAREHOLDERS TAKEOVER TOTAL FACTOR PRODUCTIVITY VALUE ADDED WEALTH 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. 2013-06-28T13:22:17Z 2013-06-28T13:22:17Z 2002-04 http://documents.worldbank.org/curated/en/2002/04/1783726/investor-protection-ownership-cost-capital http://hdl.handle.net/10986/14288 English en_US Policy Research Working Paper;No.2834 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, D.C. Publications & Research :: Policy Research Working Paper Publications & Research |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
INVESTOR PROTECTION OWNERSHIP COST OF CAPITAL AGENCY CONCEPT RISK DIVERSIFICATION INCENTIVES ACCOUNTING AGENCY PROBLEMS BALANCE SHEET BENCHMARK BOOK VALUE CAPITAL EXPENDITURES CAPITAL MARKETS CAPITAL PROJECTS CD CONTRACT ENFORCEMENT CONTROL TRANSACTIONS CORPORATE FINANCE COST OF CAPITAL COUNTRY COMPARISONS DEBT DEMAND CURVE DIVESTITURES DIVIDENDS ECONOMIC GROWTH ECONOMIC REFORMS EMPIRICAL EVIDENCE EQUILIBRIUM EXCISE TAXES EXPECTED UTILITY EXPENDITURES FEDERAL RESERVE BANK OF NEW YORK FINANCIAL DATA FINANCIAL MARKETS FIXED CAPITAL FOREIGN FIRMS FOREIGN INVESTORS INCOME INVESTOR PROTECTION LAWS LEGAL PROTECTION LEGAL REGIMES LIQUIDITY MARGINAL COST MARGINAL COSTS MARGINAL PRODUCT MARGINAL UTILITY MARGINAL VALUE MERGERS MONETARY POLICY MORAL HAZARD OPPORTUNITY COST OWNERSHIP STRUCTURE PAYOUT PENALTIES PORTFOLIO PREDICTIONS PRICE ELASTICITY PRICE ELASTICITY OF DEMAND PRODUCTION FUNCTION PRODUCTION TECHNOLOGY PROFITABILITY PROPRIETORSHIP PURCHASE PRICE RATIONAL EXPECTATIONS REORGANIZATION RESEARCH AGENDA RISK AVERSION RISK PREMIUM SHAREHOLDERS TAKEOVER TOTAL FACTOR PRODUCTIVITY VALUE ADDED WEALTH |
| spellingShingle |
INVESTOR PROTECTION OWNERSHIP COST OF CAPITAL AGENCY CONCEPT RISK DIVERSIFICATION INCENTIVES ACCOUNTING AGENCY PROBLEMS BALANCE SHEET BENCHMARK BOOK VALUE CAPITAL EXPENDITURES CAPITAL MARKETS CAPITAL PROJECTS CD CONTRACT ENFORCEMENT CONTROL TRANSACTIONS CORPORATE FINANCE COST OF CAPITAL COUNTRY COMPARISONS DEBT DEMAND CURVE DIVESTITURES DIVIDENDS ECONOMIC GROWTH ECONOMIC REFORMS EMPIRICAL EVIDENCE EQUILIBRIUM EXCISE TAXES EXPECTED UTILITY EXPENDITURES FEDERAL RESERVE BANK OF NEW YORK FINANCIAL DATA FINANCIAL MARKETS FIXED CAPITAL FOREIGN FIRMS FOREIGN INVESTORS INCOME INVESTOR PROTECTION LAWS LEGAL PROTECTION LEGAL REGIMES LIQUIDITY MARGINAL COST MARGINAL COSTS MARGINAL PRODUCT MARGINAL UTILITY MARGINAL VALUE MERGERS MONETARY POLICY MORAL HAZARD OPPORTUNITY COST OWNERSHIP STRUCTURE PAYOUT PENALTIES PORTFOLIO PREDICTIONS PRICE ELASTICITY PRICE ELASTICITY OF DEMAND PRODUCTION FUNCTION PRODUCTION TECHNOLOGY PROFITABILITY PROPRIETORSHIP PURCHASE PRICE RATIONAL EXPECTATIONS REORGANIZATION RESEARCH AGENDA RISK AVERSION RISK PREMIUM SHAREHOLDERS TAKEOVER TOTAL FACTOR PRODUCTIVITY VALUE ADDED WEALTH Himmelberg, Charles P. Hubbard, R. Glenn Love, Inessa Investor Protection, Ownership, and the Cost of Capital |
| relation |
Policy Research Working Paper;No.2834 |
| description |
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. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Himmelberg, Charles P. Hubbard, R. Glenn Love, Inessa |
| author_facet |
Himmelberg, Charles P. Hubbard, R. Glenn Love, Inessa |
| author_sort |
Himmelberg, Charles P. |
| title |
Investor Protection, Ownership, and the Cost of Capital |
| title_short |
Investor Protection, Ownership, and the Cost of Capital |
| title_full |
Investor Protection, Ownership, and the Cost of Capital |
| title_fullStr |
Investor Protection, Ownership, and the Cost of Capital |
| title_full_unstemmed |
Investor Protection, Ownership, and the Cost of Capital |
| title_sort |
investor protection, ownership, and the cost of capital |
| publisher |
World Bank, Washington, D.C. |
| publishDate |
2013 |
| url |
http://documents.worldbank.org/curated/en/2002/04/1783726/investor-protection-ownership-cost-capital http://hdl.handle.net/10986/14288 |
| _version_ |
1764429925884887040 |