We develop a dynamic incomplete-markets model where an entrenched insider, facing imperfect investor protection and non-diversifiable illiquid business risk, makes interdependent consumption, portfolio choice, expropriation, corporate investment, ownership, and business exit decisions. Unlike in the first-best, the insider's tradeoff between private benefits and under-diversification costs leads to the following results: (1) the firm either over- or under-invests, depending on firm size; (2) the insider's private valuation fundamentally differs from diversified investors valuation; (3) conditional CAPM holds for outside equity; (4) the insider demands an additional idiosyncratic risk premium; (5) the exit option and ownership dynamics are important for the insider to manage business risk.
Lan, Yingcong, Neng Wang, and Jinqiang Yang. "Investor Protection, Diversification, Investment, and Tobin's q." Working paper, Columbia Business School, 2006.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.