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Law, finance and innovation: the dark side of shareholder protection


  • Filippo Belloc


Proponents of minority shareholder protection state that national legal institutions protecting small investors boost stock markets and, in turn, the long-term performance of countries. In this paper we empirically challenge this argument. We perform three-stage least squares estimation on a sample of 48 countries during 1993–2006 and find that countries with stronger shareholder protection tend to have larger market capitalisation but also lower innovative activity. We cope with stock market endogeneity and industry heterogeneity, and circumvent omitted variables bias, so that this finding is unlikely to be driven by misspecification problems. The estimation results are interpreted, 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; innovative activity, largely based on specific investing, is particularly exposed to this problem. Copyright , Oxford University Press.

Suggested Citation

  • Filippo Belloc, 2013. "Law, finance and innovation: the dark side of shareholder protection," Cambridge Journal of Economics, Oxford University Press, vol. 37(4), pages 863-888.
  • Handle: RePEc:oup:cambje:v:37:y:2013:i:4:p:863-888

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    Cited by:

    1. Simon Deakin & Prabirjit Sarkar & Mathias Siems, 2017. "Is There a Relationship between Shareholder Protection and Stock Market Development?," Working Papers wp492, Centre for Business Research, University of Cambridge.
    2. Deakin, Simon., 2013. "Addressing labour market segmentation : the role of labour law," ILO Working Papers 994834483402676, International Labour Organization.
    3. Alan Hughes, 2014. "Short-Termism, Impatient Capital and Finance for Manufacturing Innovation in the UK," Working Papers wp457, Centre for Business Research, University of Cambridge.
    4. Michele Battisti & Filippo Belloc & Massimo Del Gatto, 2015. "Unbundling Technology Adoption and tfp at the Firm Level: Do Intangibles Matter?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(2), pages 390-414, June.
    5. Filippo Belloc, 2014. "Innovation in State-Owned Enterprises: Reconsidering the Conventional Wisdom," Journal of Economic Issues, Taylor & Francis Journals, vol. 48(3), pages 821-848.
    6. Simon Deakin, 2013. "The Legal Framework Governing Business Firms & its Implications for Manufacturing Scale & Performance: The UK Experience in International Perspective," Working Papers wp449, Centre for Business Research, University of Cambridge.
    7. Simon Deakin, 2013. "Addressing Labour Market Segmentation: The Role of Labour Law," Working Papers wp446, Centre for Business Research, University of Cambridge.
    8. repec:spr:eurasi:v:7:y:2017:i:3:d:10.1007_s40821-016-0069-x is not listed on IDEAS
    9. Dominic Chai & Simon Deakin & Prabirjit Sarkar & Ajit Singh, 2014. "Corporate Governance, Legal Origin & the Persistence of Profits," Working Papers wp465, Centre for Business Research, University of Cambridge.
    10. repec:ilo:ilowps:483448 is not listed on IDEAS
    11. Peter-Jan Engelen & Marc van Essen, 2013. "Effects of firm-level corporate governance and country-level economic governance institutions on R&D curtailment during crisis times," Chapters,in: Governance, Regulation and Innovation, chapter 3, pages 58-85 Edward Elgar Publishing.

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