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Law, Finance and Innovation: The Dark Side of Shareholder Protection

Cambridge Journal of Economics, 37(4): 863-888

40 Pages Posted: 15 Aug 2009 Last revised: 20 Jun 2015

Filippo Belloc

University of Chieti-Pescara - Department of Economic Studies

Date Written: October 1, 2012

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.

Keywords: shareholder protection, innovation, specific investments, inter-shareholder opportunism

JEL Classification: D23, K22, O31, P12

Suggested Citation

Belloc, Filippo, Law, Finance and Innovation: The Dark Side of Shareholder Protection (October 1, 2012). Cambridge Journal of Economics, 37(4): 863-888. Available at SSRN: https://ssrn.com/abstract=1452743 or http://dx.doi.org/10.2139/ssrn.1452743

Filippo Belloc (Contact Author)

University of Chieti-Pescara - Department of Economic Studies ( email )

Viale Pindaro 42
Pescara, Pescara 65127 - I
Italy

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