Do financial laws affect investment determinants? Some European evidence

Abstract

Investment-cash flow sensitivities have been extensively analysed. One reason for the excess sensitivity between investment and internal resources is market imperfections. In this article, we try to determine whether this relationship is either affected by the nature of the financial system or associated to other firmspecific determinants such as size or industry. Results show that prudent banking regulation and creditor legal protection reduce investment-cash flow sensitivities, that is, alleviate the inefficiencies associated to asymmetric information and capital market frictions. However, firm characteristics still have a word to say when taking into account financial regulations.