The Dark Side of Shareholder Protection: Cross-country Evidence from Innovation Performance

Filippo Belloc ()

Department of Economics University of Siena from Department of Economics, University of Siena

Abstract: Proponents of minority shareholder protection state that national legal institutions protecting small investors boost stock markets and, in turn, long-term countries’ performance. In this paper, we empirically challenge this argument. We perform three-stage least-square estimation on a sample of 48 countries over 1993-2006 and find that countries with stronger shareholder protection tend to have larger market capitalization but also lower innovation activity. We cope with stock market’s endogeneity and industry heterogeneity, and circumvent omitted variables bias, so that this finding is unlikely to be driven by misspecification problems. We interpret our estimation results 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; innovation activity, largely based on specific investing, is particularly exposed to this problem.

Keywords: shareholder protection; innovation; specific investments; inter-shareholder opportunism. (search for similar items in EconPapers)
JEL-codes: D23 K22 O31 P12 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:usi:wpaper:583

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