Why Does the Law Matter? Investor Protection and its Effects on Investment, Finance, and Growth
R. David McLean
University of Alberta - Department of Finance and Statistical Analysis
City University of Hong Kong (CityUHK) - Department of Accountancy
University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis; University of Alberta
January 4, 2011
Journal of Finance, Forthcoming
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
Date posted: January 7, 2011 ; Last revised: January 27, 2013
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