| Article ID: | iaor2012438 |
| Volume: | 67 |
| Issue: | 1 |
| Start Page Number: | 313 |
| End Page Number: | 350 |
| Publication Date: | Feb 2012 |
| Journal: | The Journal of Finance |
| Authors: | Mclean R David, Zhang Tianyu, Zhao Mengxin |
| Keywords: | investment |
Investor protection is associated with greater investment sensitivity to q and lower investment sensitivity to cash flow. Finance plays a role in causing these effects; in countries with strong investor protection, external finance increases more strongly with q, and declines more strongly with cash flow. We further find that q and cash flow sensitivities are associated with ex post investment efficiency; investment predicts growth and profits more strongly in countries with greater q sensitivities and lower cash flow sensitivities. The paper's findings are broadly consistent with investor protection promoting accurate share prices, reducing financial constraints, and encouraging efficient investment.