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The Dark Side of Shareholder Protection: Cross-country Evidence from Innovation Performance

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  • Filippo Belloc

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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.

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Bibliographic Info

Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 583.

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Date of creation: Jan 2010
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Handle: RePEc:usi:wpaper:583

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Keywords: shareholder protection; innovation; specific investments; inter-shareholder opportunism.;

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Cited by:
  1. Christian Bj�rnskov & Niklas Potrafke, 2012. "Political Ideology and Economic Freedom Across Canadian Provinces," Eastern Economic Journal, Palgrave Macmillan, vol. 38(2), pages 143-166.
  2. Langlois, Richard N., 2013. "Business groups and the natural state," Journal of Economic Behavior & Organization, Elsevier, vol. 88(C), pages 14-26.
  3. Belloc, Filippo, 2010. "Corporate governance and innovation: an organizational perspective," MPRA Paper 21495, University Library of Munich, Germany.

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