The Impact of Investor Protection Law on Corporate Policy: Evidence from the Blue Sky Laws

Abstract

Recent studies have debated the impact of investor protection laws on firms’ corporate policies. I exploit the passage of state investor protection statutes (“blue sky laws”) in the U.S. in the early 20th century to estimate the effects of investor protection law on firm financing decisions and investment activity. Regression estimates indicate that the passage of investor protection statutes causes firms to pay out greater dividends, issue more equity, and grow in size. The introduction of investor protection law is also associated with improvements in operating performance and market valuations. Additional analysis suggests that alternative hypotheses for the measured changes in corporate policy and performance have limited explanatory power. Overall, the evidence is strongly supportive of theoretical models which predict that investor protection laws have a significant impact on firm financing and investment policy.