Investor Protection and Equity Markets

We present a simple model of an entrepreneur going public in an environement with poor legal protection of outside shareholders. The model incorporates elements of Becker's (1968) quot;crime and punishmentquot; framework into a corporate finance environment of Jensen and Meckling (1976). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relationship between investor protection and corporate finance