Investor Protection Essay Example | Topics and Well Written Essays - 750 words

Investor Protection - Essay Example When there is strong investor protection, there is low insider expropriation, which in turn leads to lower profits appropriation, lower tunnelling of assets as well as reduced dilutions (DeFond & Hung, 2007); in return, minority and external shareholders enjoy lower agency costs, thereby reinforcing investor’s confidence. Better investor confidence eventually culminates in many benefits including higher profitability, lower costs of debt and equity, higher access to capital, higher valuation and liquidity. Moreover, better investor confidence leads to increased savings, productive investment of savings, and enhanced capital accumulation. Investor protection can be achieved through the legal approach to corporate governance, which provides laws and regulations for the protection of external investors (Spindler, 2011). Investors often feel safer to invest in countries where their rights are protected under the law, because they understand their vulnerability to expropriation. Unlike employees or suppliers who are less likely to be mistreated by firms due to their continued usefulness to the firms’ operations and sustainability, external investors must rely on the law for protection in an unfamiliar environment. Legal protection of external investors undermines expropriation technologies and mechanisms, while in an environment with no legal protection the so-called insiders (managers and controlling stockholders) can easily steal a company’s profits (La Porta et al., 2000). In that respect, investor protection renders the diversion techniques ineffective so that the insiders expropriate less, thereby crea ting a positive reputation for their organizations and obtaining external financing on better terms than when expropriation is high. The legal framework provides laws and regulations that mandate certain rights or powers belonging to