Journal Article•
Legal origins, politics, and modern stock markets
TL;DR: In this paper, the authors show that although stockholder protection, property rights, and their supporting legal institutions are quite important, legal origin is not their foundation, and they assess which approach is the better bet for future research and show how political and policy theories for the richer nations tie into systematic differences in how those nations experienced the turmoil of the early twentieth century.
Abstract: Legal origin--civil vs. common law--is said in much modern economic work to determine the strength of financial markets and the structure of corporate ownership, even in the world's richer nations. The main means are thought to lie in how investor protection and property protection connect to civil and common law legal origin. But, I show here, although stockholder protection, property rights, and their supporting legal institutions are quite important, legal origin is not their foundation. Modern politics is an alternative explanation for divergent ownership structures and the differing depths of securities markets in the world's richer nations. Some legislatures respect property and stock markets, instructing their regulators to promote financial markets; some do not. Brute facts of the twentieth century--the total devastation of many key nations, wrecking many of their prior institutions--predict modern postwar financial markets' strength well and tie closely to postwar divergences in politics and policies in the world's richest nations. Nearly every core civil law nation suffered military invasion and occupation in the twentieth century--the kinds of systemic shocks that destroy even strong institutions--while no core common law nation collapsed under that kind of catastrophe. The interests and ideologies that thereafter dominated in the world's richest nations and those nations' basic economic tasks (such as postwar reconstruction for many) varied over the last half century, and these differences in politics and tasks made one collection of the world's richer nations amenable to stock markets and another indifferent or antagonistic. These political economy ideas are better positioned than legal origin concepts to explain the differing importance of financial markets in the wealthy West. INTRODUCTION Do legal origins--common law vs. civil law--largely determine whether capital markets develop strongly? Many finance economists have concluded, in an explosion of influential articles in the past decade, that legal origin is indeed central. (1) Common law institutions effectively protect outside shareholders, it is said; civil law ones do not. This differing legal capacity to protect outside shareholders explains why some rich nations' capital markets are strong while others' are weak. The stakes aren't just academic. The developing world and international agencies are told that "transplanting the correct legal code (i.e., the common law) will enhance economic development." (2) This new legal origins view has in key circles elbowed aside the view that (1) economic function propels stock markets: stock markets develop when technology demands large enterprises and capital must be gathered from many sources, and this process works when (2) policymakers or private players build the institutions that support stock markets and (3) have enough political support that the polity does not attack finance. The last element--that national politics can confine policymakers' institution-building--has increasingly found theoretical support and evidence. Here I assess which approach--legal origin or political economy--is the better bet for future research and show how political and policy theories for the richer nations tie into systematic differences in how those nations experienced the turmoil of the early twentieth century. Differences in corporate finance in the wealthy West in the second half of the twentieth century could well be due more to the differing consequences of the earlier World Wars than to subtle differences between civil and common law. There's a powerful normative reason to get this assessment right. Many policymakers and some academics see strong financial markets as propelling economic development. (3) Thus, if we better understand what makes for strong financial markets, we can better understand how to engineer economic growth, or at least how to provide a necessary tool. …
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TL;DR: The authors argued that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes, and they summarized this evidence and attempted a unified interpretation.
Abstract: In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter. Finally, we assess the implications of this research for economic reform.
2,134 citations
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TL;DR: For example, this article found that firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings with respect to their legal origin.
Abstract: Using corporate social responsibility (CSR) ratings for 23,000 companies from 114 countries, we find that a firm's CSR rating and its country's legal origin are strongly correlated. Legal origin is a stronger explanation than “doing good by doing well” factors or firm and country characteristics (ownership concentration, political institutions, and globalization): firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings. Evidence from quasi-natural experiments such as scandals and natural disasters suggests that civil law firms are more responsive to CSR shocks than common law firms.
462 citations
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TL;DR: In this paper, the authors find that corporate social responsibility is more strongly and consistently related to legal origins than to doing good by doing well, and most firm and country characteristics such as ownership concentration, political institutions, and degree of globalization.
Abstract: A firm’s corporate social responsibility (CSR) practice and its country’s legal origin are strongly correlated. This relation is valid for various CSR ratings coming from several large datasets that comprise more than 23,000 large companies from 114 countries. We find that CSR is more strongly and consistently related to legal origins than to “doing good by doing well”-factors, and most firm and country characteristics such as ownership concentration, political institutions, and degree of globalization. In particular, companies from common law countries have lower level of CSR than companies from civil law countries, and Scandinavian civil law firms assume highest level of CSR. This link between legal origins and CSR seems to be explained by differences in ex post shareholder litigation risk as well as in stakeholder regulations and state involvement in the economy. Evidence from quasi-natural experiments such as scandals and natural disasters suggest that civil law firms are more responsive to CSR shocks than common law firms, and such responsiveness is not likely driven by declining market shares following the shock.
452 citations
Cites background from "Legal origins, politics, and modern..."
...At the macro-level, they could (re-)shed light on the role f legal origin in driving finance and other economic outcomes, which has been a long-lasting debate since the original thesis of LLSV (e.g., Rajan and Zingales, 2003; Roe, 2006; Spamann, 2010; La Porta et al., 2008)....
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TL;DR: This article argued that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes, and they summarized this evidence and attempted a unified interpretation.
Abstract: In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter. Finally, we assess the implications of this research for economic reform.
436 citations
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22 Nov 2010TL;DR: In this article, the authors discuss the managerial origins of institutional divergence in France and Germany, and the myth of the corporatist coalition in the Netherlands and the United Kingdom, as well as the noisy politics of executive pay.
Abstract: 1. Corporate control and political salience 2. Patient capital and markets for corporate control 3. The managerial origins of institutional divergence in France and Germany 4. The Netherlands and the myth of the corporatist coalition 5. Managers, bureaucrats, and institutional change in Japan 6. The noisy politics of executive pay 7. Business power and democratic politics.
435 citations
References
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01 Jan 2014
TL;DR: In this article, the authors present a case study of the private legal system created by the National Grain and Feed Association to resolve contract disputes among its members, and find that despite their industry expertise, arbitrators are reluctant to look to these indicia of immanent business norms.
Abstract: In the spirit of the Code and Karl Llewellyn, this Article begins by looking at merchant practice. It presents a case study of the private legal system created by the National Grain and Feed Association to resolve contract disputes among its members. The study pays especially close attention to the willingness of NGFA's industry-expert adjudicators to take trade usage, course of dealing, and course of performance into account in deciding cases. It finds that despite their industry expertise, NGFA arbitrators are reluctant to look to these indicia of immanent business norms. The Article then challenges the idea that courts should seek to discover and apply immanent business norms in deciding cases. It demonstrates that while the drafters of the Code sought to incorporate these norms into the law in an effort to make commercial law more responsive to and reflective of commercial reality, they failed to recognize that this approach would fundamentally alter the very reality they sought to reflect, and would do so in ways that would have undesirable effects on commercial relationships and would undermine the Code's own stated goals of promoting flexibility in commercial transactions and "permit[ting] the continued expansion of commercial practices through custom, usage and agreement of the parties."
209 citations