Legal Protection, Equity Dependence and Corporate Investment: Evidence from Around the World

50 Pages Posted: 13 Mar 2006

See all articles by K.C. John Wei

K.C. John Wei

Hong Kong Polytechnic University

Yuanto Kusnadi

Singapore Management University - School of Accountancy

Date Written: January 2007

Abstract

In this paper, we investigate the effects of legal protection of investors and the equity-financing channel on the relationship between corporate investment and stock prices in an international setting. We find that firms in countries with stronger legal protection of investors have investments that are more sensitive to their stock prices. In addition, equity-dependent firms display a higher investment-to-price sensitivity than do nonequity-dependent firms, which is consistent with the equity-financing channel argument. Finally, the positive relation between legal protection and the investment-to-price sensitivity is more pronounced for equity-dependent firms than for nonequity-dependent firms. Overall, our evidence complements the earlier finding by Baker et al. (2003) and suggests that both legal protection of investors and the equity-financing channel influence managers' corporate investment decisions with respect to changes in stock prices.

Keywords: Legal protection, Equity dependence, Corporate investment

JEL Classification: G31, G34

Suggested Citation

Wei, Kuo-Chiang (John) and Kusnadi, Yuanto, Legal Protection, Equity Dependence and Corporate Investment: Evidence from Around the World (January 2007). EFA 2006 Zurich Meetings, Available at SSRN: https://ssrn.com/abstract=890181 or http://dx.doi.org/10.2139/ssrn.890181

Kuo-Chiang (John) Wei (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Yuanto Kusnadi

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
+65 6808 5449 (Phone)

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