Legal Restrictions and Investment Growth

Authors

  • Robert Lensink,

    1. University of Groningen, The Netherlands
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    • Center for International Banking, Insurance, and Finance (CIBIF); University of Groningen, The Netherlands.

    • External CREDIT Fellow, University of Nottingham, UK.

  • Bert Scholtens

    Corresponding author
    1. University of Nottingham, UK
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    • Center for International Banking, Insurance, and Finance (CIBIF); University of Groningen, The Netherlands.


*Corresponding author. Department of Finance, University of Groningen, PO Box 800, 9700 AV Groningen, The Netherlands Phone: +31 50 3637064; Fax: +31 50 363 8252; Email: L.J.R.Scholtens@RUG.NL

SUMMARY

We analyze the impact of legal restrictions on investment growth at the firm level. With the help of a unique firm-level survey database, we analyze whether firm investments are related to the efficiency and quality of the judiciary. Furthermore, we analyze whether the investment behavior of large and small firms is influenced in the same manner and degree. Our results provide strong support for the hypothesis that investment growth may be hampered by laws that are experienced as negative by firms. We find that it especially is the smaller firms which are restricted by laws in their investment behavior. Larger (international) firms are better able to cope with the rules. These results are robust to different estimators.

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