Legal shareholder protection and corporate R&D investment

- Legal shareholder rights reduce both under- and overinvestment in R&D projects.
- Shareholder protection law further enhances the growth of R&D intensive firms.
- Legal shareholder rights also promote the GDP growth of innovative countries.

This paper investigates the effects of shareholder protection law on corporate R&D investment. I find that the institutional protection of shareholder benefits reduces both underinvestment and overinvestment in R&D projects. Legal shareholder rights significantly increase R&D investment for firms that may underinvest, but reduce R&D for firms that may overinvest. Shareholder protection further enhances the growth of firms in R&D intensive industries, and promotes the economic growth of innovative countries. The results consistently show that enforcing stronger legal shareholder protection can help firms achieve an overall more efficient capital allocation to productive R&D investment.