This study examines international differences in firms’ R&D investments across 31 countries between 2006 to 2014. We analyze whether the level of investor protection, defined as the extent of minority shareholder rights and the quality of legal enforcement, is associated with cross-country differences in R&D investments. We find that strong investor protection reduces the conflicts of interest and information asymmetry between insiders and outsiders associated with R&D investments and, therefore, encourages value-enhancing R&D investments. In addition, we find that strong investor protection mitigates the dependency of firms’ R&D investments on their internal resources and reduces R&D investment–cash flow sensitivity.
JEL classification numbers: G15, G31, G32, O31
Keywords: Investor protection, R&D investments, R&D investment–cash flow sensitivity.
ISSN: 1792-7552 (Online)