Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144239
Authors: 
Himmelberg, Charles P.
Hubbard, R. Glenn
Love, Inessa
Year of Publication: 
2002
Series/Report no.: 
Working Paper Research 25
Abstract: 
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.
Subjects: 
Investor protection
ownership
investment
cost of capital
agency costs
JEL: 
G31
G32
E22
D92
O16
Document Type: 
Working Paper

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