The dark side of investor protection: The case of innovation

Abstract

This study investigates the effects of investor protection on corporate innovation. Leveraging the revision of the China Securities Law as a natural experiment that improves investor protection, we employ a pseudo difference-in-differences identification strategy and find that the new law impedes corporate innovation. The potential channels are the proprietary costs of information disclosure due to detailed disclosure requirements and managerial myopia induced by increased litigation risk. Cross-sectional analysis reveals that the negative effect is more pronounced in state-owned enterprises, firms with more female directors, those with weaker external monitors, and high-tech firms. We also provide evidence that enhanced investor protection hinders innovation efficiency and the market valuation of patents. Our results are robust to various research designs, and we rule out several alternative explanations.