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Legal Protection, Equity Dependence and Corporate Investment: Evidence from around the World

Yuanto Kusnadi K.C. John Wei. Legal Protection, Equity Dependence and Corporate Investment: Evidence from around the World. December 2006 by Konan Chan. Background. Ample evidence on the positive relationship between corporate investment and stock prices Inv = a + b Q + c CF

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Legal Protection, Equity Dependence and Corporate Investment: Evidence from around the World

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  1. Yuanto Kusnadi K.C. John Wei Legal Protection, Equity Dependence and Corporate Investment: Evidence from around the World December 2006 by Konan Chan

  2. Background • Ample evidence on the positive relationship between corporate investment and stock prices • Inv = a + b Q + c CF • Explanations • Stock prices are informative and contain information about future investment opportunity (Tobin (1969), Chen, Goldstein, Jiang (2006)) • Equity financing channel: financially constrained firms rely equity to finance investment (Stein (1996), Baker, Stein and Wurgler (2003)) Konan Chan

  3. What’s this paper about? • Test “equity financing channel” hypothesis in an international setting • Extend Baker et al (2003) to international evidence • Propose and test the legal protection argument on the investment-Q relationship • Higher investor protection induces higher sensitivity of investment to Q • Test the interaction of legal protection and equity financing channel investment-Q relationship • Legal protection effect is stronger in equity-dep. firms Konan Chan

  4. Comments • Structure of the paper • International evidence of Baker et al (2003) • Role of legal protection • More within-country/region evidence of “equity financing channel” • More robustness checks: alternative measure of investments, equity-dependence? • Baker et al (2003) add R&D to CAPE • Almedia, Campello, Weisbach (2004): 5 measures Konan Chan

  5. Questions • Statistically significant, but not economically significant?? • Though one standard deviation of increases in legal protection increases investment-Q sensitivity by about 20-50%, the impact on real investment is at most 4% only (table 3-A) • Investment-Q sensitivity for low (high) legal protection countries is 0.012 (0.016). The difference is not so big (in terms of high legal protection countries) (table 3-B) Konan Chan

  6. Questions • How much insight we gain by adding LP? • adj. R2 does not increase much after adding LP • Is the strong effect of LP on investment-Q sensitivity is due to the least equity-dependent firms? (table 8-A) • The interaction term of Q and LP is not much different for KZ quintile 2 to 5 • What happen if we delete KZ quintile 1? • Is the LP related to price informativeness documented by Chen, Goldstein and Jiang (2006)? Konan Chan

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