SSE/EFI Working Paper Series in Economics and Finance
No 526:
Investor Protection and the Demand for Equity
Mariassunta Giannetti ()
and Yrjö Koskinen ()
Abstract: Anecdotal evidence suggests that investor protection
affects the demand for equity, but existing theories emphasize only the
effect of investor protection on the supply of equity. We build a model
showing that the demand for equity is important in explaining financial
development. If the level of investor protection is low, wealthy investors
have an incentive to become controlling shareholders and pay a high price
for their stocks, because they can earn additional benefits by
expropriating outside shareholders. As a consequence of lower expected
returns both domestic and foreign portfolio investors have a disincentive
to hold stocks. The model implies that differences in stock market
participation rates across countries and the pervasiveness of home equity
bias depend on the degree of investor protection. Additionally, we uncover
a good country bias in investment decisions as portfolio investors from
countries with low level of investor protection hold relatively more
foreign equity. We provide novel international evidence on stock market
participation rates, and on holdings of domestic and foreign stocks
consistent with the predictions of the model.
Keywords: Home Equity Bias; Portfolio Choice; Limited Participation; Investor Protection; Private Benefits of Control; (follow links to similar papers)
JEL-Codes: F21; G11; G32; G38; (follow links to similar papers)
48 pages, May 5, 2003, Revised February 23, 2004
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
hastef0526.pdf 
(577kB)
Download Statistics
Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
