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Law, Stock Markets, and Innovation





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    • James R. Brown is with the College of Business at Iowa State University, Gustav Martinsson is with the Swedish Institute for Financial Research (SIFR) and Centre of Excellence for Science and Innovation Studies (CESIS), and Bruce C. Petersen is with Washington University in St. Louis. We thank an anonymous referee, an anonymous Associate Editor, and Campbell Harvey (the Editor) for extensive suggestions that greatly improved the paper. We also appreciate insightful comments from Lee Benham, Ginka Borisova, Dino Falaschetti, Rob Fleck, Andy Hanssen, Dorothy Petersen, Per Stromberg, and seminar participants at Iowa State University, the Institute for Financial Research (SIFR), the Conference on Politics, Law, and Business at Seattle University, Research Institute of Industrial Economics, Royal Institute of Technology, Lund University, and the University of Gothenburg.


We study a broad sample of firms across 32 countries and find that strong shareholder protections and better access to stock market financing lead to substantially higher long-run rates of R&D investment, particularly in small firms, but are unimportant for fixed capital investment. Credit market development has a modest impact on fixed investment but no impact on R&D. These findings connect law and stock markets with innovative activities key to economic growth, and show that legal rules and financial developments affecting the availability of external equity financing are particularly important for risky, intangible investments not easily financed with debt.