Ceris-Cnr, W.P. N° 08/2006 

Shareholder Protection
and the Cost of Capital
Empirical Evidence
from German and Italian Firms

Julie Ann Elston
Oregon State University, Bend, Usa and The Max Planck Institute for Economics, Jena, Germany

 Laura Rondi
Politecnico di Torino and Ceris-CNR *

Abstract:

We investigate implications for the cost of capital in a model with agency conflicts between inside and outside shareholders, where the severity of agency costs depends on a parameter representing investor protection. Using firm-level data for Italy and Germany we find significant differences in shareholder protection and its implications for the firm’s ownership structure and the cost of capital. Results indicate that concentrated inside ownership increases the cost of capital for Italian firms while having no significant impact on the cost of capital for German firms. Evidence also suggests bank influence in Germany may serve to reduce investor risk for outside shareholders. In contrast, the magnitude of capital stock distortions is found to be quite important in Italy. Overall, slow growth in continental Europe may be more closely linked to institutional differences in shareholder protection between countries rather than inside ownership of firms.

Keywords: Shareholder protection, ownership structure, cost of capital, agency costs, underinvestment
 

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