Chapter 7: Investor protection and IPO survival in the Italian stock market
‘How does better protection of outside investors (both shareholders and creditors) promote market development?’ (La Porta et al., 2002, p. 1147). This research question sanctioned the beginning of the law and finance literature and has captured the attention of many scholars in the past decade. Since the seminal work by La Porta et al. (1997), previous research has shown that an effective legal system supports the development of financial markets, and has then identified in laws and their enforcement one of the key mechanisms to protect outsider investors. Despite the growing interest on the effects of regulation, researchers know relatively little about the impact of changes in investor protection on the evolution of financial markets. Prior scholars provided empirical evidence on the relationship between investor protection and stock market development either in a static perspective (for example, La Porta, 1997, 1998) or considering concise periods of time (for example, Armour et al., 2009). Nevertheless, considerable changes in laws relating to investor protection take along time to become effective (Levine, 2011) and, thus, a long-run perspective is necessary to generate convincing evidence (Gehrig and Fohlin, 2006).
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