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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

R. David McLean

Georgetown University - Department of Finance

Tianyu Zhang

City University of Hong Kong (CityUHK) - Department of Accountancy

Mengxin Zhao

Securities and Exchange Commission (SEC)

Date Written: January 4, 2011

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.

Keywords: Investor Protection, Financial Constraints, Investment-Sensitivity, Financial Development

JEL Classification: G10, G15, G28, G38

Suggested Citation

McLean, R. David and Zhang, Tianyu and Zhao, Mengxin, Why Does the Law Matter? Investor Protection and its Effects on Investment, Finance, and Growth (January 4, 2011). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1735067

R. David McLean (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC Washington DC 20057
United States

Tianyu Zhang

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Mengxin Zhao

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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