This paper presents a political economy model in which there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model’s predictions are tested on panel data for 47 countries over 1993–2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border mergers and acquisitions activity, consistent with the model.
Shareholder Protection, Stock Market Development, and Politics / Pagano, Marco; Volpin, P.. - In: JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION. - ISSN 1542-4766. - STAMPA. - 4:2/3(2006), pp. 315-341.
Shareholder Protection, Stock Market Development, and Politics
PAGANO, MARCO;
2006
Abstract
This paper presents a political economy model in which there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model’s predictions are tested on panel data for 47 countries over 1993–2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border mergers and acquisitions activity, consistent with the model.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.