1. Yuanto Kusnadi K.C. John Wei
Legal Protection, Equity Dependence and Corporate Investment: Evidence from around the World
Yuanto Kusnadi
K.C. John Wei
December 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))
December 2006
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
December 2006
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
December 2006
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 (0.016). The difference is not so big (in terms of high legal protection countries) (table 3-B)
December 2006
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)?
December 2006
Konan Chan