Shareholder Protection, Stock Market Development and Politics

Marco Pagano and Paolo Volpin

No 5378, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper presents a political economy model where 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 M&A activity, consistent with the model.

Keywords: Political economy; Shareholder protection; Corporate governance; Stock market development (search for similar items in EconPapers)
JEL-codes: G34 K22 K42 (search for similar items in EconPapers)
Date: 2005-11
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-law
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Citations: View citations in EconPapers (7)

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Working Paper: Shareholder Protection, Stock Market Development, and Politics (2005)
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