The effects of hold-up problem and wealth redistribution on the ownership structure and the cost of equity

In a world with incomplete contracts, agents have to consider the effects of hold-up and wealth redistribution problems on their investment and optimal ownership structure decisions.; In the first chapter of the thesis, I show that redistribution of wealth among agents is a special risk, which cannot be fully diversified even in integrated asset and trade markets. Unlike other country-specific factors, such redistribution does not directly affect aggregate consumption, and hence cannot be shared through trade. Redistribution increases the systematic risk of minority shareholders, especially in countries with weaker regulations, larger size and higher growth volatility.; In the second chapter, I provide empirical evidence that the proxies for redistribution significantly explains cross-country differences in the cost of equity as predicted by my theory. These proxies include measures of securities regulations, law enforcement, accounting disclosure and extra legal institutions. The economic impact is also significant; securities laws that improve disclosure requirements can decrease the cost of equity by up to 3%.; In the third chapter, I analyze the effect of renegotiation-proof relational contracts on the optimal ownership structure of the firm in the presence of hold-up problems. A new literature argues that long-term relations (relational contracts) affect the optimal allocation of ownership by assuming that agents are capable of committing not to renegotiate the initial agreement. This assumption is both unrealistic and influential on the ownership allocation decision. I first solve the renegotiation problem in repeated games by relaxing the assumption that game structure is independent of the history of play. Then, I show that predictions of the property rights theory of the firm hold for both very low and very high discount rates. However, there may be a mid-region where joint ventures are optimal. Joint ventures have a higher chance of being optimal in industries where agents actions affect the structure of the game, i.e. where reputation and network effects are important.