Shareholder Protection and the Cost of Capital: Empirical Evidence from German and Italian Firms.” CERIS-CNR Working Paper No

(Preliminary draft) 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 in Germany and Italy. Using firm-level data 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 suggests that shareholder protection is stronger in Germany than Italy and that bank influence in Germany may serve to reduce investor risk for outside shareholders. Results suggest that slow growth in continental Europe may be more closely linked to institutional differences in shareholder protection between countries rather than inside ownership of firms