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Expropriation risk by block holders, institutional quality and expected stock returns

Hearn, B., Phylaktis, K. and Piesse, J. (2017). Expropriation risk by block holders, institutional quality and expected stock returns. Journal of Corporate Finance, 45, pp. 122-149. doi: 10.1016/j.jcorpfin.2017.04.016

Abstract

We study the asset pricing implications arising from imperfect investor protection using a new governance measure. This is defined as the product of institutional quality in a country and the proportion of free float shares, which captures the impact of controlling block holders. Using monthly returns of 4756 blue chip firms from 50 international equity markets for 13 years, we show through tests of variants of the augmented-CAPM, that a two factor CAPM augmented with a factor mimicking portfolio based on our new investor protection metric yields the highest explanatory power, especially for markets that exhibit true variation in ownership types.

Publication Type: Article
Additional Information: © 2017, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Investor protection; Legal origin; Asset pricing; International financial markets
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/17338
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