Investment, protection, ownership, and the cost of capital

Arbeitspapier

We investigate the cost of capital in a model with an agency conflict between inside managers and outside shareholders. Inside ownership reflects the classic tradeoff between incentives and risk diversification, and the severity of agency costs depends on a parameter representing investor protection. In equilibrium, the marginal cost of capital is a weighted average of terms reflecting both idiosyncratic and systematic risk, and weaker investor protection increases the weight on idiosyncratic risk. Using firm-level data from 38 countries, we estimate the predicted relationships among investor protection, inside ownership, and the marginal cost of capital. We discuss implications for the determinants of firm size, the relationship between Tobin's Q and ownership, and the effect of financial liberalizations.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: NBB Working Paper ; No. 25

Classification and Topics

• Classification: Wirtschaft ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Investment; Capital; Intangible Capital; Capacity ; Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
• Subject: Investor protection ; ownership ; investment ; cost of capital ; agency costs ; Prinzipal-Agent-Theorie ; Eigentum ; Investition ; Kapitalkosten ; Theorie ; Welt

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Himmelberg, Charles P. ; Hubbard, R. Glenn ; Love, Inessa
• Event: Veröffentlichung
• (who): National Bank of Belgium
• (where): Brussels
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/144239
• Last update: 10.03.2025, 11:45 AM CET