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Property rights and the cost of capital

European Journal of Law and Economics volume 39, pages 523–537 (2015)Cite this article

Abstract

In countries with more secure property rights, the cost of capital is lower, suggesting higher investment rates. Using data from 49 countries we extend the conventional capital-asset pricing model (CAPM) to include a property rights risk-factor. In the conventional CAPM model only a single risk factor—systemic risk—is considered. However, when using a world market portfolio to estimate systemic risk in national portfolios, little of the required rate of return is explained in less developed as compared to more developed countries. Adding a factor representing institutional risk increases predictive power substantially. Further, we find that property rights affect the transmission of information, which suggests that markets price information differently, and allocate resources less efficiently, in countries with less secure property rights. We find that the CAPM model performs better in countries with more secure property rights.

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Notes

  1. They stressed the importance of “(…) the guarantee of property rights, the free transfer of property by voluntary contractual agreement, and the keeping of promises made” (Kasper and Streit 1998, p. 20).

  2. A political risk-premium is proposed by Faure and Skogh (2003).

  3. See e.g. Elton and Gruber (1995).

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Acknowledgments

Financial support from the Marianne and Marcus Wallenberg Foundation is gratefully acknowledged. Furthermore we acknowledge valuable comments provided by Åke E. Andersson, Niclas Berggren, Sameeksha Desai, Dennis C. Mueller, Göran Skogh, and participants at conferences of the European Association of Law and Economics.

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Authors and Affiliations

  1. Jönköping International Business School and Ratio Institute, P.O. Box 3203, SE-103 64, Stockholm, Sweden

    Per-Olof Bjuggren

  2. Jönköping International Business School and Swedish Entrepreneurship Forum, P.O. Box 1026, SE-551 11, Jönköping, Sweden

    Johan E. Eklund

Authors
  1. Per-Olof Bjuggren
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  2. Johan E. Eklund
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Correspondence to Per-Olof Bjuggren.

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Bjuggren, PO., Eklund, J.E. Property rights and the cost of capital. Eur J Law Econ 39, 523–537 (2015). https://doi.org/10.1007/s10657-013-9396-x

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  • DOI: https://doi.org/10.1007/s10657-013-9396-x

Keywords

  • Asset pricing
  • International financial markets
  • Property rights
  • Cost of capital
  • Investment

JEL classification

  • G12
  • G15
  • G38
  • N20