Showing papers by "Rafael La Porta published in 2002"
TL;DR: In this article, the authors present a model of the effects of legal protection of minority shareholders and of cash-f low ownership by a controlling shareholder on the valuation of firms and test this model using a sample of 539 large firms from 27 wealthy economies.
Abstract: We present a model of the effects of legal protection of minority shareholders and of cash-f low ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders and in firms with higher cashf low ownership by the controlling shareholder. RECENT RESEARCH SUGGESTS THAT THE EXTENT of legal protection of investors in a country is an important determinant of the development of its financial markets. Where laws are protective of outside investors and well enforced, investors are willing to finance firms, and financial markets are both broader and more valuable. In contrast, where laws are unprotective of investors, the development of financial markets is stunted. Moreover, systematic differences among countries in the structure of laws and their enforcement, such as the historical origin of their laws, account for the differences in financial development ~La Porta et al. ~1997, 1998!!. How does better protection of outside investors ~both shareholders and creditors! promote financial market development? When their rights are better protected by the law, outside investors are willing to pay more for financial assets such as equity and debt. They pay more because they recognize that, with better legal protection, more of the firm’s profits would come back to them as interest or dividends as opposed to being expropriated by the entrepreneur who controls the firm. By limiting expropriation, the law raises the price that securities fetch in the marketplace. In turn, this enables more entrepreneurs to finance their investments externally, leading to the expansion of financial markets. Although the ultimate benefit of legal investor protection for financial development has now been well documented, the effect of protection on valuation has received less attention. In this paper, we present a theoretical and empirical analysis of this effect.
3,127 citations
TL;DR: In this paper, the authors show that government ownership is large and pervasive and higher in countries with low levels of per capita income, backward financial systems, interventionist and inefficient governments, and poor protection of property rights.
Abstract: We assemble data on government ownership of banks around the world. The data show that such ownership is large and pervasive, and higher in countries with low levels of per capita income, backward financial systems, interventionist and inefficient governments, and poor protection of property rights. Higher government ownership of banks in 1970 is associated with slower subsequent financial development and lower growth of per capita income and productivity. This evidence supports “political” theories of the effects of government ownership of firms. THIS PAPER DISCUSSES A NEGLECTED ASPECT of financial systems of many countries: government ownership of banks. It shows that such ownership is pervasive around the world, and has had significant consequences for economic and financial development. There are two broad views of the government’s participation in financial markets. The first, basically optimistic, “development” view is associated with Alexander Gerschenkron ~1962!, who focuses on the necessity of financial development for economic growth. Gerschenkron argues that privately owned commercial banks have been the crucial vehicle of channeling savings into industry in several industrializing countries in the second half of the 19th century, especially Germany. However, in some countries—most conspicuously Russia—economic institutions were not sufficiently developed for private banks to play the crucial development role. “The scarcity of capital in Russia was such that no banking system could conceivably succeed in attracting sufficient funds to finance a large scale industrialization; the standards of honesty in business were so disastrously low, the general distrust of the public so great, that no bank could have hoped to attract even such small capital funds as were available, and no bank could have successfully engaged in long term credit policies in an economy where fraudulent bankruptcy had been almost elevated to the rank of a general business practice” ~Gerschenkron ~1962! ,p . 19 !. In such countries, the government could step in and, through its financial institutions, jump start both financial and eco
1,780 citations
TL;DR: In this article, the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check were measured and described by Lex Mundi member law firms in 109 countries.
Abstract: In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries. Moreover, procedural formalism is associated with higher expected duration of judicial proceedings, more corruption, less consistency, less honesty, less fairness in judicial decisions, and inferior access to justice. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries.
508 citations
TL;DR: In this paper, the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check were measured and described by Lex Mundi member law firms in 109 countries.
Abstract: In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries. Moreover, procedural formalism is associated with higher expected duration of judicial proceedings, more corruption, less consistency, less honesty, less fairness in judicial decisions, and inferior access to justice. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries.
307 citations
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TL;DR: In this article, the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check were measured and described by Lex Mundi member law firms in 109 countries.
Abstract: In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries. Moreover, procedural formalism is associated with higher expected duration of judicial proceedings, more corruption, less consistency, less honesty, less fairness in judicial decisions, and inferior access to justice. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries.
58 citations
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TL;DR: The authors found that the English institutions of judicial independence and checks and balances are strong predictors of economic freedom, but not of political freedom, and that judicial independence explains half of the positive effect of common law legal origin on measures of economic and political freedom.
Abstract: Hayek (1960) distinguishes the institutions of English freedom, which guarantee the independence of judges from political interference in the administration of justice, from those of American freedom, which allow judges to restrain law-making powers of the sovereign through constitutional review We create a data base of constitutional rules in 71 countries that reflect these institutions of English and American freedom, and ask whether these rules predict economic and political freedom in a cross-section of countries We find that the English institutions of judicial independence are strong predictors of economic freedom and weaker predictors of political freedom The American institutions of checks and balances are strong predictors of political but not of economic freedom Judicial independence explains half of the positive effect of common law legal origin on measures of economic freedom
28 citations
TL;DR: In this article, the authors created a data base of constitutional rules in 71 countries that reflect these institutions of English and American freedom, and ask whether these rules predict economic and political freedom in a cross-section of countries.
Abstract: Hayek (1960) distinguishes the institutions of English freedom, which guarantee the independence of judges from political interference in the administration of justice, from those of American freedom, which allow judges to restrain law-making powers of the sovereign through constitutional review. We create a data base of constitutional rules in 71 countries that reflect these institutions of English and American freedom, and ask whether these rules predict economic and political freedom in a cross-section of countries. We find that the English institutions of judicial independence are strong predictors of economic freedom and weaker predictors of political freedom. The American institutions of checks and balances are strong predictors of political but not of economic freedom. Judicial independence explains half of the positive effect of common law legal origin on measures of economic freedom.
22 citations
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TL;DR: In this paper, Klapper et al. identified 644 firms as financially distressed and 83 firms filed for bankruptcy during the 1997-1998 financial crisis in East Asia and found that stronger creditor rights and a better judicial system in the country increased the likelihood of bankruptcy filing.
Abstract: The financial crisis in East Asia in 1997-1998 led to financial distress of firms with different financial and ownership structures and happened across countries with very diverse institutional setups. Studying this event allows the identification of factors that determine the use of bankruptcy as a means of resolving corporate financial distress. Of a sample of 1,472 publicly traded firms in five East Asian countries, we identify 644 firms as financially distressed. Of these, 83 filed for bankruptcy during 1997-1998. We find, controlling for some firm characteristics, that the likelihood of filing is lower for bank-owned and group-affiliated firms. Furthermore, we find that stronger creditor rights and a better judicial system in the country increases the likelihood of bankruptcy filing. JEL Classification Codes: G33, G34. World Bank Policy Research Working Paper 2133, June 1999 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. * The authors are from the University of Amsterdam and CEPR, the World Bank and CEPR, and the World Bank, respectively. We thank Stuart Gilson, Patrick Honohan, Larry Lang, Rafael La Porta, Raghuram Rajan, Anil Shivdasani, Andrei Shleifer, Pablo Spiller, Michelle White, seminar participants at the World Bank, Ohio State University, the 1999 EFA meetings, the 2000 AFA meetings, and an anonymous referee. Corresponding author Leora Klapper, email: lklapper@worldbank.org, tel: 202-473-8738.
20 citations
25 Apr 2002
TL;DR: A growing body of theoretical and empirical research documents and analyzes how history as well as current conditions shape institutions as discussed by the authors, which helps explain many differences in performance, and informs the design of economic and political reforms.
Abstract: The transition from socialism, the Asian financial crisis, and the European economic and political integration, have challenged understanding of how capitalist economies and societies work. Capitalist economies differ in important ways in how they regulate market activities, including the extent of public ownership, regulation of social harms and externalities, contract enforcement, modes of dispute resolution, etc. Capitalist countries also differ in how they regulate political competition, including the structure of electoral systems, the nature of checks and balances, legal procedures, and so on. The institutional differences among countries are both highly systematic, and have important consequences of economic and social outcomes. The historical origin of a country's legal system has proved to be a crucial factor shaping institutions. A growing body of theoretical and empirical research documents and analyzes how history as well as current conditions shape institutions. This research, called the new comparative economics, helps explain many differences in performance, and informs the design of economic and political reforms.
16 citations
TL;DR: In this article, the authors created a data base of constitutional rules in 71 countries that reflect these institutions of English and American freedom, and ask whether these rules predict economic and political freedom in a cross-section of countries.
Abstract: Hayek (1960) distinguishes the institutions of English freedom, which guarantee the independence of judges from political interference in the administration of justice, from those of American freedom, which allow judges to restrain law-making powers of the sovereign through constitutional review. We create a data base of constitutional rules in 71 countries that reflect these institutions of English and American freedom, and ask whether these rules predict economic and political freedom in a cross-section of countries. We find that the English institutions of judicial independence are strong predictors of economic freedom and weaker predictors of political freedom. The American institutions of checks and balances are strong predictors of political but not of economic freedom. Judicial independence explains half of the positive effect of common law legal origin on measures of economic freedom.
8 citations