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

摘要

In this paper, we investigate whether legal protection and the equity financing channel affect the relationship between corporate investment and stock prices in an international setting. We find that equity-dependent firms display larger sensitivity of corporate investment to stock prices, which is consistent with the equity-financing channel argument. In addition, firms in countries with stronger legal protection have corporate investment that is more sensitive to their stock prices. This relationship is found to be more pronounced for equity-dependent firms. Overall, our evidence complements the earlier finding by Baker et al. (2003) and does not support the notion that the stock market is just a sideshow.