This study examines whether stronger investor protection mitigates the inefficiency in corporate investments. Using an international database of 49 countries from 1990 to 2018, we find that earning management is positively associated with corporate investment and stronger investor protection significantly weakens the positive link between earning management and corporate investment. To mitigate endogeneity problems, we use the introduction of board reforms as an exogenous shock to investor protection and our findings are robust to the introduction of board reforms. Our empirical findings remain unaffected after controlling for stock market development.

JEL classification: G14, G31
Key words: Investor protection, Mispricing, Corporate investment, Board reform​