Journal Article

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

Filippo Belloc

in Cambridge Journal of Economics

Published on behalf of Cambridge Political Economy Society

Volume 37, issue 4, pages 863-888
Published in print July 2013 | ISSN: 0309-166X
Published online January 2013 | e-ISSN: 1464-3545 | DOI: https://dx.doi.org/10.1093/cje/bes068
Law, finance and innovation: the dark side of shareholder protection

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  • Technological Change; Research and Development
  • Law and Economics
  • Production and Organizations
  • Capitalist Systems

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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.

Keywords: Shareholder protection; Innovation; Specific investments; Intershareholder opportunism; D23; K22; O31; P12

Journal Article.  12516 words.  Illustrated.

Subjects: Technological Change; Research and Development ; Law and Economics ; Production and Organizations ; Capitalist Systems

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