Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 393: Law, Stock Markets, and Innovation

James R. Brown (), Gustav Martinsson () and Bruce C. Petersen ()
Additional contact information
James R. Brown: Department of Finance, Iowa State University
Gustav Martinsson: Institute for Financial Research (SIFR), Centre of Excellence for Science and Innovation Studies (CESIS), Royal Institute of Technology
Bruce C. Petersen: Department of Economics, Washington University in St. Louis

Abstract: We study a broad sample of firms across 32 countries and find that strong shareholder protections and better access to stock market financing lead to substantially higher long-run rates of R&D investment, particularly in small firms, but are unimportant for fixed capital investment. Credit market development has a modest impact on fixed investment but no impact on R&D. These findings connect law and stock markets with innovative activities key to economic growth, and show that legal rules and financial developments affecting the availability of external equity financing are particularly important for risky, intangible investments not easily financed with debt.

Keywords: Financial development; Investor protection; Stock markets; R&D; Innovation; Economic growth

JEL-codes: G32; K20; O16; O30

46 pages, January 21, 2015

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