FIN-01-054

Investor Protection and Equity Markets

October 2001

Andrei Shleifer and Daniel Wolfenzon

ABSTRACT

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 (1968) “crime and punishment” framework into a corporate finance environment of Jensen and Meckling (1976). We examine the entrepreneur’s decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relationship 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.

Andrei Shleifer
Institution: Harvard University
Telephone: (617) 495-5046
Fax: (617) 496-1708
Email: ashleifer@harvard.edu
Homepage:http://post.economics.harvard.edu/faculty/shleifer/shleifer.html

Daniel Wolfenzon
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0309
Fax: (212) 995-4233
Email: dwolfenz@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~dwolfenz

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