The Dark Side of Shareholder Protection: Cross-country Evidence from Innovation Performance
AbstractProponents 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.
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Bibliographic InfoPaper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 583.
Date of creation: Jan 2010
Date of revision:
shareholder protection; innovation; specific investments; inter-shareholder opportunism.;
Find related papers by JEL classification:
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- P12 - Economic Systems - - Capitalist Systems - - - Capitalist Enterprises
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