Shleifer and Wolfenzon present a model of an entrepreneur going public in an environment with poor legal protection for outside shareholders. The model incorporates elements of Becker's "crime and punishment" framework into a corporate finance environment. They examine the entrepreneur's decision and market equilibrium, showing how legal protection influences corporate finance, capital flows between rich and poor countries, and the politics of investor protection reform. The model is consistent with empirical findings on the relationship between investor protection and corporate finance, including larger stock markets, more listed firms, higher dividends, lower ownership concentration, and lower private benefits of control. The model also explains why capital flows are limited between rich and poor countries and how improvements in investor protection affect welfare. The model shows that entrepreneurs gain more from improved investor protection in open economies. The model is consistent with empirical evidence on financial development and corporate governance. The paper concludes that better investor protection leads to higher firm valuation, more listed firms, and lower private benefits of control. The model also predicts that capital flows are more efficient in countries with better investor protection. The model is consistent with recent empirical evidence on financial development and corporate governance.Shleifer and Wolfenzon present a model of an entrepreneur going public in an environment with poor legal protection for outside shareholders. The model incorporates elements of Becker's "crime and punishment" framework into a corporate finance environment. They examine the entrepreneur's decision and market equilibrium, showing how legal protection influences corporate finance, capital flows between rich and poor countries, and the politics of investor protection reform. The model is consistent with empirical findings on the relationship between investor protection and corporate finance, including larger stock markets, more listed firms, higher dividends, lower ownership concentration, and lower private benefits of control. The model also explains why capital flows are limited between rich and poor countries and how improvements in investor protection affect welfare. The model shows that entrepreneurs gain more from improved investor protection in open economies. The model is consistent with empirical evidence on financial development and corporate governance. The paper concludes that better investor protection leads to higher firm valuation, more listed firms, and lower private benefits of control. The model also predicts that capital flows are more efficient in countries with better investor protection. The model is consistent with recent empirical evidence on financial development and corporate governance.