The "rst term is positive. The second term contains LP/Lk, which is negative.
A higher value of k (i.e., a weaker legal environment) implies that (LP/LR)/P
increases, so that the value of the "rm, P, becomes more sensitive in percentage
terms to a change in the rate of return, R. The same result holds if we allow "rms
to borrow debt as well as issue equity. However, the presence of debt implies
a range of values for R within which a lower value of R actually means less
stealing because the manager steals less (or even transfers funds into the "rm if
that is possible) in order to enable the "rm to service its debt and therefore
preserve the possibility of future stealing. If R falls su$ciently low, however, then
the manager will choose to loot the "rm and it will go out of existence. In the
data, therefore, we will look at percentage changes in "rms' values