Finance Papers
Document Type
Journal Article
Date of this Version
2010
Publication Source
Journal of Financial and Quantitative Analysis
Volume
45
Issue
1
Start Page
135
Last Page
168
DOI
10.1017/S0022109009990524
Abstract
We study the effects of investor protection on stock returns and portfolio allocation decisions. In our theoretical model, if investor protection is weak, wealthy investors have an incentive to become controlling shareholders. In equilibrium, the stock price reflects the demand from both controlling shareholders and portfolio investors. Due to the high demand from controlling shareholders, the price of weak corporate governance stocks is not low enough to fully discount the extraction of private benefits. Thus, stocks have lower expected returns when investor protection is weak. This has implications for domestic and foreign investors’ stockholdings. In particular, we show that portfolio investors’ participation in the domestic stock market and home equity bias are positively related to investor protection and provide original evidence in their support.
Recommended Citation
Giannetti, M., & Koskinen, Y. (2010). Investor Protection, Equity Returns, and Financial Globalization. Journal of Financial and Quantitative Analysis, 45 (1), 135-168. http://dx.doi.org/10.1017/S0022109009990524
Date Posted: 27 November 2017
This document has been peer reviewed.
Comments
At the time of publication, author Yrjo Koskinen was affiliated with Boston University School of Management and CEPR. Currently, he is a faculty member at the Wharton School at the University of Pennsylvania.