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.

Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.

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Legal Determinants of External Finance

世界経済・社会統計 = World development indicators

We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means’s image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash f low rights, primarily through the use of pyramids and participation in management.

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Corporate Ownership Around the World

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.

Resolution of Corporate Distress in East Asia

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.

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The new comparative economics: a first look

Recent research has documented large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of capital markets, in dividend policies, and in the access of firms to external finance. We suggest that there is a common element to the explanations of these differences, namely how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems.

Investor protection and corporate governance

Several authors suggest that trust is an important determinant of cooperation between strangers in a society, and therefore of performance of social institutions. We argue that trust should be particularly important for the performance of large organizations. In a cross-section of countries, evidence on government performance, participation in civic and professional societies, importance of large firms, and the performance of social institutions more generally supports this hypothesis. Moreover, trust is lower in countries with dominant hierarchical religions, which may have deterred networks of cooperation trust hold up remarkably well on a cross-section of countries.

Trust in Large Organizations

The paper characterizes several empirical regularities of closed- end fund prices and examines the extent to which a 'sentiment' model of asset prices is consistent with the empirical regularities. We find that after controlling for the effect of cross-border investment restrictions, country funds trade at an average discount. Discounts vary substantially and contribute to a variance in country fund weekly returns which is generally three times greater than the returns on the net asset value (NAV). Regression analysis suggests that discounts have predictive power for fund returns but not for NAV returns, suggesting that investor 'sentiment' is a component of the price of a fund and not its NAV. Estimation of an unobserved components model on the discounts of the funds reveals a significant and strongly persistent common component across fund discounts. Regressions of fund and NAV returns on financial variables reveal that fund prices are 'sticky' with respect to movements in the host country's stock market and overly sensitive to variation in the U.S. and world stock markets. This relation is unaffected when we consider separately funds whose host countries restrict cross-border investment and funds which invest in emerging stock markets.

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Rafael La Porta

Papers

Resolution of Corporate Distress in East Asia

The new comparative economics: a first look

Investor protection and corporate governance

Trust in Large Organizations

What Moves the Discount on Country Equity Funds