Yuanto kusnadi k c john wei
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Legal Protection, Equity Dependence and Corporate Investment: Evidence from around the World PowerPoint PPT Presentation


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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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Yuanto kusnadi k c john wei

Yuanto Kusnadi

K.C. John Wei

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

December 2006 by Konan Chan


Background

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


What s this paper about

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


Comments

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


Questions

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


Questions1

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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