Institutionalization and Prudence Attitude in an Imperfect Competitive Market

This paper addresses whether institutionalization could improve market efficiency by differentiating the sector size effect and the market concentration effect and studies their respective impacts on investors' market participation and asset pricing. We develop a theoretical model under anticipated utility combined with a Wang-transform probability distortion function. An increase in market concentration raises the cost of capital and encourages participation, whereas the expansion in the proportion of institutional investors may display an inverse or non-monotonic effect on asset premium and market participation. These results are caused by the conflicting interactions of the information channel and the risk-sharing channel among investors