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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. 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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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