Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 66, Issue 1, Pages 3-27Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/S0304-405X(02)00149-6
Keywords
investor protection; ownership structure; financial systems
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We present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders. The model incorporates elements of Becker's (J. Political Econ. 106 (1968) 172) crime and punishment framework into a corporate finance environment of Jensen and Meckling (J. Financial Econ. 3 (1976) 305). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance. It also sheds light on the patterns of capital flows between rich and poor countries and on the politics of reform of investor protection. (C) 2002 Elsevier Science B.V. All rights reserved.
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