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Abstract: Proponents of minority shareholder protection state that national legal institutions protecting small investors boost stock markets and, in turn, long-term countries’ performance. In this paper, we empirically challenge this argument. We perform three-stage least-square estimation on a sample of 48 countries over 1993-2006 and find that countries with stronger shareholder protection tend to have larger market capitalization but also lower innovation activity. We cope with stock market’s endogeneity and industry heterogeneity, and circumvent omitted variables bias, so that this finding is unlikely to be driven by misspecification problems. We interpret our estimation results arguing that stronger shareholder protection may depress, rather than encourage, the most valuable corporate productions, because it enables small and diversified shareholders to play opportunistic actions against undiversified stockholders, after specific investments are undertaken by the company; innovation activity, largely based on specific investing, is particularly exposed to this problem.
shareholder protection, innovation, specific investments, inter-shareholder opportunism
Abstract: Proponents of minority shareholder protection state that national legal institutions protecting small investors boost stock markets and, in turn, long-term countries’ performance. In this paper, we empirically challenge this argument. We perform three-stage least-square estimation on a sample of 48 countries over 1993-2006 and find that countries with stronger shareholder protection tend to have larger market capitalization but also lower innovation activity. We cope with stock market’s endogeneity and industry heterogeneity and circumvent omitted variables bias, so that this finding is unlikely to be driven by misspecification problems. We interpret our estimation results arguing that stronger shareholder protection may depress, rather than encourage, the most valuable corporate productions, because it enables small and diversified shareholders to play opportunistic actions against undiversified stockholders, after specific investments are undertaken by the company; innovation activity, largely based on specific investing, is particularly exposed to this problem.
Abstract: It is often claimed that a corporate law providing shareholders with formal legal means of control should help corporations reach success. Does the empirical evidence corroborate this view? This paper is aimed at answering this question. Specifically, we investigate the effect of shareholder empowerment on innovation activity, which is central to the dynamic through which corporations and economies improve their performance over time. We perform a cross-country three-stage least square estimation on a sample of 49 countries and find that legally mandated rules of corporate governance that allow individual shareholders to apply pressure directly to managers have a negative and statistically significant effect on countries’ innovation. We also offer an interpretation of such a result. While it is generally assumed that shareholders share a common economic goal in improving corporate performance, diversified shareholders eliminate in fact firm-specific risk. Thus, when the corporate law allows shareholders to easily intervene in business decisions, it also makes to play strategic threats possible for the diversified shareholders. This, in turn, may discourage undiversified stockholders from allocating corporate capital to irreversible productions, such as innovation processes, as a defensive strategy.
shareholder control, innovation, specific investments, inter-shareholder opportunism
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