This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

Law and Finance

This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

A Survey of Corporate Governance

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor

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THE SPHERE of model financial economics encompasses finance, micro investment theory and much of the economics of uncertainty. As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both permeable and flexible. The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics. Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory. But for all its mathematical refinement, the research has nevertheless had a direct and significant influence on practice. ’ It was not always thus. Thirty years ago, finance theory was little more than a collection of anecdotes, rules of thumb, and manipulations of accounting data with an almost exclusive focus on corporate financial management. There is no need in this meeting of the guild to recount the subsequent evolution from this conceptual potpourri to a rigorous economic theory subjected to systematic empirical examination? Nor is there a need on this occasion to document the wide-ranging impact of the research on finance practice.2 I simply note that the conjoining of intrinsic intellectual interest with extrinsic application is a prevailing theme of research in financial economics. The later stages of this successful evolution have however been marked by a substantial accumulation of empirical anomalies; discoveries of theoretical inconsistencies; and a well-founded concern about the statistical power of many of the test methodologies.3 Finance thus finds itself today in the seemingly-paradoxical position of having more questions and empirical puzzles than at the start of its

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-6261.1987.tb04565.x

A Simple Model of Capital Market Equilibrium with Incomplete Information

International Diversification of Investment Portfolios

Publisher Summary The choice of an individual decision maker among alternative risky ventures may be regarded as a two-step procedure. The decision maker chooses an efficient set among all available portfolios, independently of his tastes or preferences. Then, the decision maker applies individual preferences to this set to choose the desired portfolio. The subject of this chapter is the analysis of the first step. It deals with optimal selection rules that minimize the efficient set by discarding any portfolio that is inefficient in the sense that it is inferior to a member of the efficient set, from point of view of each and every individual, when all individuals' utility functions are assumed to be of a given general class of admissible functions. The analysis presented in the chapter is carried out in terms of a single dimension such as money, both for the utility functions and for the probability distributions. However, the results may easily be extended, with minor changes in the theorems and the proofs, to the multivariate case. The chapter explains a necessary and sufficient condition for efficiency, when no further restrictions are imposed on the utility functions. It presents proofs of the optimal efficiency criterion in the presence of general risk aversion, that is, for concave utility functions.

The Efficiency Analysis of Choices Involving Risk

While Stochastic Dominance has been employed in various forms as early as 1932, it has only been since 1969-1970 that the notion has been developed and extensively employed in the area of economics, finance, agriculture, statistics, marketing and operations research.

In this survey, the first-, second-and third-order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s.

Stochastic dominance and expected utility: survey and analysis

Suppose that an investor seeks to maximize the expected value of some utility function U(R), where R is the rate of return this period on his portfolio. Frequently it is more convenient or economical for such an investor to determine the set of mean-variance efficient portfolios than it is to find the portfolio which maximizes EU(R). The central problem considered here is this: would an astute selection from the E,V efficient set yield a portfolio with almost as great an expected utility as the maximum obtainable EU? A number of authors have asserted that the right choice of E, V efficient portfolio will give precisely optimum EU if and only if all distributions are normal or U is quadratic.' A frequently implied but unstated corollary is that a well-selected point from the E, V efficient set can be trusted to yield almost maximum expected utility if and only if the invector's utility function is approximately quadratic, or if his a priori beliefs are approximately normal. Since statisticians frequently reject the hypothesis that return distributions are normal, and John Pratt and Kenneth Arrow have each shwn us absurd implications of a quadratic utility function, some writers have concluded that mean-variance analysis should be rejected as the criterion for portfoliQ selection, no matter how economical it is as compared to alternate formal methods of analysis. Consider, on the other hand, the following evidence to the contrary. Suppose that two investors, let us call them Mr. Bernoulli and Mr. Cramer, have the same probability beliefs about portfolio returns in the forthcoming period; while their utility functions are, respectively,

Approximating Expected Utility by a Function of Mean and Variance

Preface. 1. On the Measurement of Risk. 2. Expected Utility Theory. 3. Stochastic Dominance Decision Rules. 4. Stochastic Dominance: The Quantile Approach. 5. Algorithms for Stochastic Dominance. 6. Stochastic Dominance with Specific Distributions. 7. The Empirical Studies. 8. Applications of Stochastic Dominance Rules. 9. Stochastic Dominance and Risk Measures. 10. Stochastic Dominance and Diversification. 11. Decision Making and the Investment Horizon. 12. The CAPM and Stochastic Dominance. 13. Non-Expected Utility and Stochastic Dominance. 14. Future Research.

Haim Levy

Papers

International Diversification of Investment Portfolios

The Efficiency Analysis of Choices Involving Risk

Stochastic dominance and expected utility: survey and analysis

Approximating Expected Utility by a Function of Mean and Variance

Stochastic Dominance: Investment Decision Making under Uncertainty