Why Does the Law Matter? Investor Protection and its Effects on Investment, Finance, and Growth
64 Pages Posted: 7 Jan 2011 Last revised: 27 Jan 2013
Date Written: January 4, 2011
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.
Keywords: Investor Protection, Financial Constraints, Investment-Sensitivity, Financial Development
JEL Classification: G10, G15, G28, G38
Suggested Citation: Suggested Citation
By Andrew Ang