Rafael La Porta

Bio: Rafael La Porta is an academic researcher from Dartmouth College. The author has contributed to research in topics: Shareholder & Enforcement. The author has an hindex of 66, co-authored 107 publications receiving 107032 citations. Previous affiliations of Rafael La Porta include Harvard University & National Bureau of Economic Research.

The Regulation of Entry

Abstract: We present new data on the regulation of entry of start-up firms in 75 countries. The data set contains information on the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have fewer entry regulations. The evidence is inconsistent with Pigouvian (helping hand) theories of benevolent regulation, but support the (grabbing hand) view that entry regulation benefits politicians and bureaucrats.

Good News for Value Stocks: Further Evidence on Market Efficiency

Abstract: This article examines the hypothesis that the superior return to so-called value stocks is the result of expectational errors made by investors. We study stock price reactions around earnings announcements for value and glamour stocks over a 5-year period after portfolio formation. The announcement returns suggest that a significant portion of the return difference between value and glamour stocks is attributable to earnings surprises that are systematically more positive for value stocks. The evidence is inconsistent with a risk-based explanation for the return differential. MOST FINANCE RESEARCHERS AGREE that simple value strategies based on such ratios as book-to-market, earnings-to-price and cash flow-to-price have produced superior returns over a long period of time.' Interpreting these superior returns, however, has been more controversial. On one side, Fama-French (1992) argue that these superior returns represent compensation for risk along the lines of the Merton (1973) intertemporal capital asset pricing model (ICAPM) where portfolios formed on book-to-market ratios are interpreted as mimicking portfolios whose returns are correlated with relevant state variables representing consumption or production opportunities. On the other side, Lakonishok, Shleifer, and Vishny (LSV, 1994) contend that there is little evidence that high book-to-market and high cash-flow-to-price stocks are riskier based on conventional notions of systematic risk. LSV argue instead that value stocks have been underpriced relative to their risk and return characteristics for various behavioral and institutional reasons. A specific behavioral explanation pursued in more depth by LSV (1994) is that the superior return on value stocks is due to expectational errors made by investors. In particular, investors tend to extrapolate past growth rates too far into the future. Evidence going back to Little (1962) suggests that company

The Unofficial Economy and Economic Development

Abstract: In developing countries, informal firms account for up to about half of all economic activity. Using data from World Bank firm-level surveys, we find that informal firms are small and extremely unproductive compared with even the small formal firms in the sample, and especially relative to the larger formal firms. Formal firms are run by much better educated managers than informal ones and use more capital, have different customers, market their products, and use more external finance. Few formal firms have ever operated informally. This evidence supports the dual economy (“Wal-Mart”) theory of development, in which growth comes about from the creation of highly productive formal firms. Informal firms keep millions of people alive but disappear as the economy develops.

The Quality of Government

Abstract: We investigate empirically the determinants of the quality of governments in a large cross-section of countries. We assess government performance using measures of government intervention, public sector efficiency, public good provision, size of government, and political freedom. We find that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics or Muslims exhibit inferior government performance. We also find that the larger governments tend to be the better performing ones. The importance of historical factors in explaining the variation in government performance across countries sheds light on the economic, political, and cultural theories of institutions.

Judicial Checks and Balances

Abstract: In the Anglo†American constitutional tradition, judicial checks and balances are often seen as crucial guarantees of freedom Hayek distinguishes two ways in which the judiciary provides such checks and balances: judicial independence and constitutional review We create a new database of constitutional rules in 71 countries that reflect these provisions We find strong support for the proposition that both judicial independence and constitutional review are associated with greater freedom Consistent with theory, judicial independence accounts for some of the positive effect of common†law legal origin on measures of economic freedom The results point to significant benefits of the Anglo†American system of government for freedom

Law and Finance

Abstract: 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

Abstract: 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.

Legal Determinants of External Finance

Abstract: 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.

Corporate Ownership Around the World

Abstract: 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.