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RFS Advance Access published online on June 3, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp042
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© The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

Investor Protection and Interest Group Politics

Lucian A. Bebchuk
Harvard Law School and NBER

Zvika Neeman
Boston University and Tel-Aviv University

Lucian A. Bebchuk, Program on Corporate Governance, Harvard Law School, 1545 Mass. Ave., Cambridge, MA 02138; telephone: (617) 495-3138; fax: (617) 812-0554. E-mail: bebchuk{at}law.harvard.edu.

JEL Classification: D72, G20, G30, K22, O16


  Abstract

We model how three groups—insiders in existing public companies, institutional investors, and entrepreneurs planning to take firms public—compete for influence over politicians setting the level of investor protection. We identify factors that push toward suboptimal investor protection, including corporate insiders’ ability to use public firms’ assets to influence politicians, and institutional investors’ inability to capture fully the value of investor protection for outside investors. Entrepreneurs and public firms’ interest in raising equity capital does not fully eliminate the distortions arising from insiders seeking to extract rents from capital in place. Our analysis produces many testable predictions concerning how investor protection varies over time and around the world.

We have benefited from the helpful comments of Jennifer Arlen, Michal Barzuza, Laura Beny, John Ferejohn, Dennis Gromb, Marcel Kahan, Randy Kroszner, Stuart Myers, Holger Spamann, Fausto Panunzi, Enrico Perotti, Andrea Prat, Mark Roe, Paulo Volpin, and participants in workshops and conferences at Beijing, Columbia, Georgetown, Harvard, LBS, LSE, Moscow, NYU, Oxford, Shanghai, Stockholm, Toronto, the AFA meeting, the ALEA meeting, and the NBER-RFS corporate governance conference.


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