Andrei Shleifer and Daniel Wolfenzon present a model of an entrepreneur going public in an environment with poor legal protection for outside shareholders. The model integrates elements from Becker's "crime and punishment" framework into Jensen and Meckling's corporate finance framework. The authors examine the entrepreneur's decision-making process and market equilibrium, showing how the quality of investor protection affects the size of projects, the amount of cash flow sold, and the level of ownership concentration. The model generates predictions consistent with empirical regularities, such as higher stock market values in countries with better investor protection. It also explains patterns of capital flows between rich and poor countries and the politics of investor protection reform. The model suggests that improvements in investor protection lead to higher dividends and lower private benefits of control, and that entrepreneurs are more likely to use political influence to improve investor protection when their country is open to capital flows.Andrei Shleifer and Daniel Wolfenzon present a model of an entrepreneur going public in an environment with poor legal protection for outside shareholders. The model integrates elements from Becker's "crime and punishment" framework into Jensen and Meckling's corporate finance framework. The authors examine the entrepreneur's decision-making process and market equilibrium, showing how the quality of investor protection affects the size of projects, the amount of cash flow sold, and the level of ownership concentration. The model generates predictions consistent with empirical regularities, such as higher stock market values in countries with better investor protection. It also explains patterns of capital flows between rich and poor countries and the politics of investor protection reform. The model suggests that improvements in investor protection lead to higher dividends and lower private benefits of control, and that entrepreneurs are more likely to use political influence to improve investor protection when their country is open to capital flows.