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Law, Stock Markets, and Innovation

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  • JAMES R. BROWN
  • GUSTAV MARTINSSON
  • BRUCE C. PETERSEN

Abstract

We study a broad sample of firms across 32 countries and find that strong shareholder protections and better access to stock market financing lead to substantially higher long-run rates of R&D investment, particularly in small firms, but are unimportant for fixed capital investment. Credit market development has a modest impact on fixed investment but no impact on R&D. These findings connect law and stock markets with innovative activities key to economic growth, and show that legal rules and financial developments affecting the availability of external equity financing are particularly important for risky, intangible investments not easily financed with debt.
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Suggested Citation

  • James R. Brown & Gustav Martinsson & Bruce C. Petersen, 2013. "Law, Stock Markets, and Innovation," Journal of Finance, American Finance Association, vol. 68(4), pages 1517-1549, August.
  • Handle: RePEc:bla:jfinan:v:68:y:2013:i:4:p:1517-1549
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    2. Doyle, Jason P. & Pentecost, Robin D. & Funk, Daniel C., 2014. "The effect of familiarity on associated sponsor and event brand attitudes following negative celebrity endorser publicity," Sport Management Review, Elsevier, vol. 17(3), pages 310-323.
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    4. Lohse, Tim & Pascalau, Razvan & Thomann, Christian, 2014. "Public enforcement of securities market rules: Resource-based evidence from the Securities and Exchange Commission," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 197-212.
    5. Bianchini, Stefano & Krafft, Jackie & Quatraro, Francesco & Ravix, Jacques, 2015. "Corporate Governance, Innovation and Firm Age: Insights and New Evidence," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201504, University of Turin.
    6. repec:eee:corfin:v:47:y:2017:i:c:p:236-252 is not listed on IDEAS
    7. Viral V. Acharya & Zhaoxia Xu, 2013. "Financial Dependence and Innovation: The Case of Public versus Private Firms," NBER Working Papers 19708, National Bureau of Economic Research, Inc.
    8. repec:eee:corfin:v:46:y:2017:i:c:p:261-283 is not listed on IDEAS
    9. Falato, Antonio & Sim, Jae W., 2014. "Why Do Innovative Firms Hold So Much Cash? Evidence from Changes in State R&D Tax Credits," Finance and Economics Discussion Series 2014-72, Board of Governors of the Federal Reserve System (U.S.).
    10. Hsu, Po-Hsuan & Tian, Xuan & Xu, Yan, 2014. "Financial development and innovation: Cross-country evidence," Journal of Financial Economics, Elsevier, vol. 112(1), pages 116-135.
    11. Lööf, Hans & Martinsson, Gustav & Mohammadi, Ali, 2017. "Finance and Innovative Investment in Environmental Technology: The Case of Sweden," Working Paper Series in Economics and Institutions of Innovation 445, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    12. Tim Lohse & Christian Thomann, 2015. "Are bad times good news for the Securities and Exchange Commission?," European Journal of Law and Economics, Springer, vol. 40(1), pages 33-47, August.
    13. Jacopo Ponticelli & Leonardo S. Alencar, 2016. "Court Enforcement, Bank Loans, and Firm Investment: Evidence from a Bankruptcy Reform in Brazil," The Quarterly Journal of Economics, Oxford University Press, vol. 131(3), pages 1365-1413.
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    16. Acharya, Viral V & Xu, Zhaoxia, 2014. "Financial Dependence and Innovation: The Case of Public versus Private Firms," CEPR Discussion Papers 9829, C.E.P.R. Discussion Papers.
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    19. Brown, James R. & Petersen, Bruce C., 2015. "Which investments do firms protect? Liquidity management and real adjustments when access to finance falls sharply," Journal of Financial Intermediation, Elsevier, vol. 24(4), pages 441-465.
    20. Xiao, Gang, 2013. "Legal shareholder protection and corporate R&D investment," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 240-266.
    21. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2017. "What promotes R&D? Comparative evidence from around the world," Research Policy, Elsevier, vol. 46(2), pages 447-462.
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    24. HOSONO Kaoru & TAKIZAWA Miho, 2017. "Intangible Capital and the Choice of External Financing Sources," Discussion papers 17080, Research Institute of Economy, Trade and Industry (RIETI).
    25. Sakiru Adebola Solarin & Yuen Yee Yen, 2016. "A global analysis of the impact of research output on economic growth," Scientometrics, Springer;Akadémiai Kiadó, vol. 108(2), pages 855-874, August.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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