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.

/pdf/legal-determinants-of-external-finance-gqbv6rpnw6.pdf

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.

/pdf/corporate-ownership-around-the-world-1zjebm7ik6.pdf

Corporate Ownership Around the World

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.(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)

What Moves the Discount on Country Equity Funds

Recent research has documented large differences among countries in own ership concentration in publicly traded firms, in the breadth and depth of capital markets, in dividend policies, and in the access of firms to external fi nance. A common element to the explanations of these differences is 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

La proteccion del inversionista y la administracion corporativa

One of the strands in the literature on financial development in economics/economic history argues that legal codes, often imposed by imperial powers on their respective colonies, have important implications for the development of financial institutions, and through these institutions, on eventual economic growth. Particularly, it is argued that Anglo-American common law traditions accord better protection to creditors, require higher information disclosure, and as a result contribute directly to the growth of this sector. Therefore countries where common law traditions were imposed are financially more developed ceteris paribus (when measured by various criteria for financial efficiency) than those with non-common law traditions. This paper will maintain that this line of argument is crucially limited both theoretically and epistemologically in that it almost completely excludes all power considerations from its ceteris paribus conditions. Theoretically, it cannot explain conformity to legal norms independent of distributional consequences for actors adhering to the same, and epistemologically it cannot successfully separate the effect of norms from power relationships that could be argued to sustain them. Building, and improving, on the literature on ‘political’ explanations for the emergence of financial markets, this paper will demonstrate the conditions under which certain — though not all — kinds of ‘colonial’ relationships tend to retard financial development notwithstanding putatively ‘efficient’ legal codes.

Rafael La Porta

Papers

What Moves the Discount on Country Equity Funds

La proteccion del inversionista y la administracion corporativa

Financial Systems of 'Colonial States': The Case of India