Importance Of Investor Protection

The term investor protection defines the entity of efforts and activities to observe safeguard and enforce the rights and claims of a person in his role as an investor. Investor protection is necessary because in many countries expropriation of minority shareholders and creditors by the controlling shareholders is extensive. Expropriation means the insiders (the managing shareholders and the managers) use the profits to benefit themselves rather than return the money to investors. The absence of investor protection the investors would not be needed to pay back the creditors or to distribute profits amongst shareholders, which would lead to a breakdown of the external financial mechanism. Investor protection is important of the greater security

When they are protected from expropriation investors pay more securities which is beneficial to both creditors and shareholders. When creditor’s rights are protected it would encourage them to lend more. The Shareholder’s rights are encouraged as measured by the valuation of firms, the number of listed firms and the rate at which the firms go public. In the shareholders and creditors eyes the protection is not only the rights written as laws but also the effectiveness of their enforced. The countries that protect their investors have a higher stock market and the companies have a higher IPO (initial public offering) .Investor protection influences the real economy through its effect on the financial market. Economic growth can be accelerated through financial development in three different

When the Japanese government was thriving in the 1980’s bank based corporate governance system was better because it enabled banks to provide loans to firms for long term investment projects. Banks were able to provide loans to firms that underperformed, facing cash flow problems as to avoid a financial disaster. The Japanese economy collapsed in the 1990’s due to the fact that the Japanese banks over lent to firms that were in decline and required a wholesale reorganization. The Japanese banks worked alongside with the entrepreneurs to discourage outside investors who were a threat to their control and to collect rent on the bank