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Why Does the Law Matter? Investor Protection and its Effects on Investment, Finance, and GrowthR. David McLeanUniversity of Alberta - Department of Finance and Statistical Analysis Tianyu ZhangCity University of Hong Kong (CityUHK) - Department of Accountancy Mengxin ZhaoUniversity of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis January 4, 2011 Journal of Finance, Forthcoming Abstract: Investor protection is associated with greater investment-sensitivity to q and lower investment-sensitivity to cash flow. Finance plays a role in causing these effects; in countries with strong investor protection external finance increases more strongly with q, and declines more strongly with cash flow. We further find that q- and cash flow-sensitivities are associated with ex-post investment efficiency; investment predicts growth and profits more strongly in countries with greater q-sensitivities and lower cash flow-sensitivities. The paper’s findings are broadly consistent with the notions that investor protection laws promote accurate share prices, reduce financial constraints, and encourage efficient investment.
Number of Pages in PDF File: 64 Keywords: Investor Protection, Financial Constraints, Investment-Sensitivity, Financial Development JEL Classification: G10, G15, G28, G38 Accepted Paper SeriesDate posted: January 7, 2011 ; Last revised: January 27, 2013Suggested CitationContact Information
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