In the paper, Why Does the Law Matter? Investor Protection and its Effects on Investment, Finance, and Growth, forthcoming in the Journal of Finance, we study how investor protection affects firm-level resource allocations. We test for these effects using both ex-ante and ex-post measures of efficiency. We conduct our analyses in a large sample of firms from 44 countries during the period 1990 to 2007. We show that the relations between q and investment and q and external finance are stronger in countries with stronger investor protection laws. These findings are consistent with the notion that investor protection laws encourage accurate share prices, efficient investment, and better access to external finance.
Editor’s Note: The following post comes to us from David McLean of the Department of Finance at the University of Alberta, Tianyu Zhang of the Accounting Department at the Chinese University of Hong Kong, and Mengxin Zhao of the Department of Finance at the University of Alberta.