Globalisation is benefiting shareholders as it is becoming increasingly easy to invest their money in companies all over the world. For instance, at the end of 2020, 56.3% of shares in British companies were held by foreign investors - a new record.
At the same time, the Chinese government is nationalising its e-learning sector, drying up a market into which $10.5 billion was poured in 2020.
The combination of these events leads to the question of how far investors are protected when investing their money. Therefore, this research paper aims to answer the research question: With global investors searching for higher returns in international markets, what is the role of investor protection in developing international financial markets and real economies?
Table of Contents
1. Introduction
2. Discussion
3. Conclusion
Research Objectives and Topics
This research paper examines the significance of investor protection mechanisms in the context of globalized financial markets, specifically investigating how regulatory frameworks influence investor confidence and the development of national economies in light of recent market volatility and regulatory interventions.
- Role of investor protection in international capital markets
- Distinction between internal and external protection mechanisms
- Comparison of legal tradition impacts (Common Law vs. Civil Law)
- Implications of information asymmetry between managers and shareholders
- Challenges for international investors in evaluating market safety vs. high returns
Excerpt from the Book
2. Discussion
Investors are the core of a capital market, as without them capital markets would not exist (Sparrow 2000, quoted from Hamzah/Ahmad, 2018). In fact, investor protection is one of the regulations of a capital market and aims to give investors confidence in individual companies and their management. In theory, this results in a higher willingness of investors to invest in the company, which has a positive impact on the overall development of a country's capital market (Hamzah/Ahmad, 2018).
The previous example of the expropriation of a market by the Chinese government resulted in a short-term daily decline of the Hang Seng Index of about 4.4% (cf. yahoo! Finance, 2022). This shows how an entire capital market suffers, at least in the short term, from declining investor confidence as a result of such expropriations.
For international investors, the question now arises as to what form investor protection can take and to what extent the respective strength of investor protection within a country influences its own returns.
La Porta et al. differentiate between internal and external mechanisms in investor protection (cf. La Porta et al., 2000). Accordingly, external mechanisms originate from a country's legislation and represent regulations on security, bankruptcy, competition, takeovers, accounting or the stock exchange or are anchored in company law. Internal investor protection techniques relate to the companies themselves. Companies can protect their shareholders and build trust through access to disclosure or accounting requirements, a right to a share of dividends, a right to vote for directors, identical terms for underwriting new shares for minority and majority shareholders, or the right to impeach directors and call an extraordinary general meeting for shareholders. Furthermore, investors can enhance their investor protection by attending shareholder meetings.
Summary of Chapters
1. Introduction: This chapter contextualizes the rise of globalized investment and highlights the inherent risks posed by national regulatory actions, establishing the foundation for the research question.
2. Discussion: This section analyzes the theoretical framework of investor protection, detailing technical mechanisms and contrasting legal systems to evaluate their effectiveness in mitigating information asymmetry.
3. Conclusion: The final chapter synthesizes the findings, emphasizing the necessity of robust investor protection frameworks for long-term capital market success while acknowledging the lack of a universal regulatory solution.
Keywords
Investor protection, Capital markets, Globalisation, Shareholders, Corporate governance, Common law, Civil law, Internal mechanisms, External mechanisms, Asset expropriation, Information asymmetry, Financial regulation, Market confidence
Frequently Asked Questions
What is the primary focus of this research?
The paper explores the role and necessity of investor protection within international financial markets, particularly as cross-border investment becomes more accessible and prevalent.
What are the core thematic areas discussed?
The core themes include the definition of investor protection, the structural differences between internal and external regulatory mechanisms, and the impact of national legal systems on market security.
What is the central research question?
The study aims to determine the role that investor protection plays in developing international financial markets and real economies while global investors pursue higher returns.
How is the research approached?
The paper utilizes a literature-based analytical approach, referencing established frameworks by La Porta et al. and recent real-world examples like the Hang Seng Index fluctuations to assess regulatory effectiveness.
What content is covered in the main body (Discussion)?
The discussion segment categorizes protection into internal and external mechanisms, discusses the historical context of legal systems (Common vs. Civil law), and highlights the problem of information asymmetry between managers and minority investors.
Which keywords best describe the paper?
The key concepts include investor protection, corporate governance, capital markets, common law systems, external versus internal mechanisms, and the importance of legal regulations.
How do internal and external protection mechanisms differ?
External mechanisms refer to state-level legislation (bankruptcy laws, stock exchange regulations), while internal mechanisms are firm-specific strategies (shareholder voting rights, transparency, and disclosure requirements).
Why does the author consider the La Porta et al. study to be aged?
The author notes that the study's reliance on the "Neuer Markt" to prove the efficacy of regulation was undermined by that market's subsequent collapse, suggesting the need for more current regulatory evaluations.
- Quote paper
- Marcel Mosner (Author), 2022, Investor Protection, Munich, GRIN Verlag, https://www.grin.com/document/1303231
