We examine how equity mispricing affects corporate investment in an international setting. We find that investment is more sensitive to stock prices for equity-dependent firms than for non-equity-dependent firms in our international sample. Investment is also more sensitive to stock prices for firms located in countries with more developed capital markets (i.e., lower costs of raising capital), higher share turnover (i.e., shorter shareholder horizons), and higher R&D intensity (i.e., more opaque assets). More importantly, the positive relation between equity dependence and the sensitivity of investment to stock prices is more pronounced for firms located in these same countries. These findings are consistent with the equity-financing hypothesis and the catering hypothesis on corporate investment proposed by Baker et al. (2003) and Polk and Sapienza (2009), respectively.

Institutional investors, collectively the majority shareholders of most publicly traded corporations, play important roles in almost all aspects of corporate finance. This special issue puts together sixteen papers covering a wide range of topics, such as M&As, capital structure, bonds and loans, corporate governance, IPOs, VCs, SEOs, broker/underwriter relationships, behavioral finance, corporate disclosure, and regulation. These special issue papers demonstrate that institutional investors, a traditional focus of investments research, are worthy of continued and further academic inquiry in many corporate finance topics. In terms of directions for future research, we believe that the availability of new datasets (or existing datasets not yet widely used in corporate finance) and the application of new or unique research methodologies could bear fruit for researchers, as demonstrated by some papers in this special issue. In terms of datasets, the success of Abel Noser institutional trading data serves as a good example.

Based on a difference-in-differences approach, we find strong evidence that the initial enforcement of insider trading laws improves capital allocation efficiency. The effect is concentrated in developed markets and manifests shortly after the enforcement year. Further analysis shows that the improvement is positively associated with the increase in liquidity around the enforcement year and the opaqueness of the information environment before the enforcement year. The improvement is more pronounced for firms operating in more competitive markets, being more financially constrained, and with more severe agency problems. Finally, we find increased accounting performance after the enforcement and the increase is positively associated with the improvement in capital allocation efficiency. Overall, our evidence suggests that the initial enforcement of insider trading laws improves capital allocation efficiency by providing more information to guide managerial decisions and by reducing market frictions arising from information asymmetry and agency problems.

This study examines the effect of firm-level corporate governance on the cost of equity capital in emerging markets and how the effect is influenced by country-level legal protection of investors. We find that firm-level corporate governance has a significantly negative effect on the cost of equity capital in these markets. In addition, this corporate governance effect is more pronounced in countries that provide relatively poor legal protection. Thus, in emerging markets, firm-level corporate governance and country-level shareholder protection seem to be substitutes for each other in reducing the cost of equity. Our results are consistent with the finding from McKinsey's surveys that institutional investors are willing to pay a higher premium for shares in firms with good corporate governance, especially when the firms are in countries where the legal protection of investors is weak.