Armour, John and Deakin, Simon and Sarkar, Prabirjit and Siems, Mathias and Singh, Ajit (2007): Shareholder protection and stockmarket development: an empirical test of the legal origins hypothesis. Published in: Centre for Business Research Working Paper Series No. WP358 (December 2007)
Download (373Kb) | Preview
We test the ‘law matters’ and ‘legal origin’claims using a newly created panel dataset measuring legal change over time in a sample of developed and developing countries. Our dataset improves on previous ones by avoiding country-specific variables in favour of functional and generic descriptors, by taking into account a wider range of legal data, and by considering the effects of weighting variables in different ways, thereby ensuring greater consistency of coding. Our analysis shows that legal origin explains part of the pattern of change in the adoption of shareholder protection measures over the period from the mid-1990s to the present day: in both developed and developing countries, common law systems were more protective of shareholder interests than civil law ones. We explain this the result on the basis of the head start common law systems had in adjusting to an emerging ‘global’ standard based mainly on Anglo-American practice. Our analysis also shows, however, that civil law origin was not much of an obstacle to convergence around this model, since civilian systems were catching up with their counterparts in the common law. We then investigate whether there was a link in this period between increased shareholder protection and stock market development, using a number of measures such as stock market capitalisation, the value of stocktrading and the number of listed firms, after controlling for legal origin, the state of economic development of particular countries, and their position on the World Bank rule of law index. We find no evidence of a long-run impact of legal change on stock market development. This finding is incompatible with the claim that legal origin affects the efficiency of legal rules and ultimately economic development. Possible explanations for our result are that laws have been overly protective of shareholders; transplanted laws have not worked as ex- pected; and, more generally, the exogenous legal origin effect is not as strong as widely supposed.
|Item Type:||MPRA Paper|
|Original Title:||Shareholder protection and stockmarket development: an empirical test of the legal origins hypothesis|
|Keywords:||law and finance, shareholder rights, corporate Governance, corporate finance, legal origins, comparative law|
|Subjects:||K - Law and Economics > K2 - Regulation and Business Law > K22 - Business and Securities Law
N - Economic History > N2 - Financial Markets and Institutions > N20 - General, International, or Comparative
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
P - Economic Systems > P5 - Comparative Economic Systems > P50 - General
|Depositing User:||Ajit Singh|
|Date Deposited:||26. May 2012 18:18|
|Last Modified:||15. Feb 2013 14:24|
Aguilera, R. and Cuervo-Cazurra, A. (2004) ‘Codes of good governance worldwide: what is the trigger?’Organization Studies, 25: 415-443.
Ahlering, B. and Deakin, S. (2007), ‘Labour regulation, corporate governance and legal origin: a case of institutional complementarity?’Law & Society Review 41: 865-98.
Armour, J. (2008), ‘Codification and UK company law’, in Association du Bi-centenaire du Code de Commerce (ed)., Bicentenaire du Code de Commerce 1807-2007: Les Actes des Colloques (Paris: Dalloz), 287-310.
Armour, J., Deakin, S., Lele, P. and Siems, M. (2007)‘How legal rules evolve: evidence from panel data’, paper presented to the Annual Conference of the Law and Society Association, Berlin, July.
Armour, J.and Skeel, D. (2007)‘Who makes the rules for hostile takeovers and why? The peculiar divergence of US and UK takeover regulation’Georgetown Law Journal 95: 1727-1774.
Bainbridge, S. (2006a)‘The case for limited shareholder voting rights’UCLA Law Review 53: 601-636.
Bainbridge, S. (2006b) ‘Director primacy and shareholder disempowerment’Harvard Law Review 119:1735-1758.
Bebchuk, L. (2005) ‘The case for increasing shareholder power’ Harvard Law Review 118: 835-913.
Bebchuk, Lucian A. (2006) ‘Letting shareholders set the rules’Harvard Law Review 119: 1784-1813.
Beck, T., Demirgüç-Kunt, A.and Levine, R. (2000) ‘A new database on financial development and structure’ World Bank Economic Review 14: 597-605.
Beck,T. and Demirgüç-Kunt, A. (2005) ‘Law and firms’ access to finance’American Law and Economics Review 7: 211-252.
Beck T., Demirgüc-Kunt A. and Levine R.(2003a)‘Law and finance: why does legal origin matter?’Journal of Comparative Economics, 31: 653-675.
Beck T., Demirgüc-Kunt A. and Levine R. (2003b) ‘Law, endowments and finance’ Journal of Financial Economics, 70-173-181:
Beck T. and Levine R. (2003c)‘Legal Institutions and Financial Development’NBER Working Paper No10126.
Berglof, E., and von Thadden,E.-L. (1999), ‘The Changing Corporate Governance Paradigm: Implications for Transition and Developing Countries’, working paper, Stockholm School of Economics.
Berkowitz,D., Pistor, K., and Richard, J.F. (2003), ‘The transplant effect’American Journal of Comparative Law, 51:163-203.
Botero J., Djankov S., La Porta R., Lopez-de-Silanes F. and Shleifer A. (2004) ‘The regulation of labour’ Quarterly Journal of Economics, 119:1340-1382.
Braendle, U. (2006), ‘Shareholder protection in the USA and Germany: on the fallacy of LLSV’German Working Papers in Law and Economics, vol. 2006,article 18. http://www.bepress.com/gwp/default/vol2006/iss1/art18
Cheffins, B.R. (2001),‘Does law matter? The separation of ownership and control in the United Kingdom’Journal of Legal Studies, 30: 459-484.
Chor, D. and Freeman,R.B. (2005), ‘The 2004 Global Labour Survey: workplace institutions and practices around the world’ NBER Working Paper No 11598.
Claessens,S. and Laeven, L. (2003),‘Financial development, property rights, and growth’Journal of Finance,58: 2401-2436.
Claessens, S. and Klapper, L. (2005), ‘Bankruptcy around the world: explanations of its relative use’, American Law and Economics Review, 7:253-283.
Coffee, J.C. (2001), ‘The rise of dispersed ownership: the role of law in the separation of ownership and control’Yale Law Journal, 111: 1-82.
Cools,S. (2005), ‘The real difference in corporate law between the United States and continental Europe: distribution of powers’Delaware Journal of Corporate Law, 30: 697-766.
Davies, P. (1998), Gower and Davies’Principles of Modern Company Law 6th ed (London: Sweet & Maxwell)
Deakin,S.(2007) ‘Industrialisation,legal origin and economic development in historical perspective.’ Paper presented to the conference on Changing Institutions in Developed Democracies: Economics, Politics and Welfare, Paris, 24-25 May 2007.
Deakin, S., Lele, P. and Siems, M. (2007)‘The evolution of labour law: calibrating and comparing regulatory regimes’ International Labour Review 146: 133-162.
Djankov,S., La Porta, R., Lopez de Silanes,F., Shleifer, A., (2005) ‘The law and economics of self-dealing’ NBER Working Paper No. W11883.
Djankov, S., LaPorta, R., Lopes-de-Silanes, F., and Shleifer, A. (2002) ‘The regulation of entry’ Quarterly Journal of Economics, 117: 1-37.
Djankov S., Glaeser E., La Porta R., Lopez-de-Silanes F. and Shleifer A. (2003)‘The new comparative economics’ Journal of Comparative Economics, 31: 595-619.
Djankov, S., Hart, O., McLeish, C., and Shleifer, A. (2006), ‘Debt enforcement around the world’ECGI Finance Working Paper No 147/2007.
Fagernäs,S., Sarkar, P., and Singh,A. (2007), ‘Legal origin, shareholder protection and the stock market: new challenges from time series analysis’, CBR Working Paper No. 343, University of Cambridge; forthcoming in B. Yurtoglu and K. Gugler (eds.) Essays in Honour of Dennis Mueller.
Funken, K.(2003),‘The best of both worlds: the trend towards convergence of the civil law and the common law system’, working paper, University of Munich School of Law.
Gilson, R. (2001), ‘Globalizing corporate governance: convergence of form or function’ American Journal of Comparative Law, 49: 329-357.
Glaeser E. and Shleifer A. (2002)‘Legal origins’ Quarterly Journal of Economics, 117:1193-1229.
Glaeser E. and Shleifer A. (2003)‘The rise of the regulatory state’ Journal of Economic Literature, 41: 401-425.
Glenn, H.P. (2007) Legal Traditions of the World: Sustainable Diversity in Law (Oxford: OUP).
Greenspan, A. (1998) Testimony before the Committee on Banking and Financial Services, US House of Representatives, 30 January.
Hansmann, H. and Kraakman, R. (2001)‘The end of history for corporate law’ Georgetown Law Journal, 89:439-468.
Hayek, F.A. (1960) The Constitution of Liberty (London: Routledge and Kegan Paul).
Hayek, F.A. (1980) Law, Legislation and Liberty (London: Routledge).
Jackson, H. and Roe,M. (2007) ‘Public enforcement of securities laws: preliminary evidence’, paper presented to the Second Annual Conference on Empirical Legal Studies, NYU, November 2007; available at http://ssrn.com/abstract=1000086.
Johnson S., La Porta R., Lopez-de-Silanes F., Shleifer A. (2000)‘Tunneling’American Economic Review, 90: 22-27.
Kraakman, R.,.Davies, P., Hansmann, H., Hertig, G., Kanda, H., Hopt, K. and Rock, E. (eds.)The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford: Oxford University Press).
La Porta R., Lopez-de-Silanes F., Shleifer A. and Vishny R. (1997) ‘Legal determinants of external finance’Journal of Finance, 52: 1131-1150
La Porta R., Lopez-de-Silanes F., Shleifer A. and Vishny R. (1998)‘Law and finance’ Journal of Political Economy, 106: 1113-55
La Porta R., Lopez-de-Silanes F. and Shleifer A. (1999a) ‘Corporate ownership around the world’ Journal of Finance, 54: 471-517
La Porta R., Lopez-de-Silanes F., Shleifer A. and Vishny R. (1999b)‘Investor protection: origins, consequences, reform,’Harvard University, manuscript.
La Porta R., Lopez-de-Silanes F., Shleifer A. and Vishny R. (2000) ‘Agency problems and dividend policies around the world’ Journal of Finance, Vol 58: 3-27
La Porta R., Lopez-de-Silanes F., and Shleifer, A. (2006) ‘What works in securities laws?’ Journal of Finance, 61: 1-32.
Lele, P. and Siems, M. (2007a), ‘Shareholder protection: a leximetric approach’ Journal of Corporate Law Studies, 7: 17-50.
Lele, P. and Siems, M. (2007b),‘Diversity in shareholder protection in common law countries’ 5/1 DICE-Report, Journal for Institutional Comparisons 3-9.
Levine, R. (1997),‘Financial development and economic growth: views and agenda’Journal of Economic Literature, 35: 688-726.
Litvak, K. (2007) ‘Sarbanes-Oxley and the cross-listing premium’ Michigan Law Review, 105: 1857-1898.
Mahoney, P.G. (2001), ‘The common law and economic growth: Hayek might be right’ Journal of Legal Studies, 30: 503-525.
Mattei, U. (1997),Comparative Law and Economics (Michigan: University of Michigan Press).
North, Douglass C. (1990) Institutions, Institutional Change, and Economic Performance. Cambridge: CUP.
OECD (2004) Employment Outlook (Paris: OECD).
Pagano, M. and P. Volpin (2006).’Shareholder protection, stock market development, and politics’, Journal of the European Economic Association 4:315-341.
Pistor, K., Keinan, Y., Kleinheisterkamp, J., and West, M. (2003) ‘The evolution of corporate law: a cross-country comparison’ University of Pennsylvania Journal of International Economic Law, 23:791-871.
Pistor, K. (2005), ‘Legal ground rules in coordinated and liberal market economies’ECGI Law Working Paper No 30/2005.
Rajan, R. and Zingales, L.(2003). ‘The great reversals: the politics of financial development in the twentieth century’ Journal of Financial Economics 69:5-50
Rajan, R. and Zingales, L. (2006), ‘The persistence of underdevelopment: constituencies and competitive rent preservation’NBER Working Paper 12093.
Roe, M. (2003), Political Determinants of Corporate Governance (Oxford: OUP).
Roe, M. (2006) ‘Legal origins, politics and modern stock markets’ Harvard Law Review, 120: 460-527.
Sarkar, P.(2007) ‘Corporate governance, stock market development and private capital accumulation: a case study of India’, paper presented at the conference: “Corporate Accountability, Limited Liability and the Future of Globalisation’ at The Centre for International Studies and Diplomacy (CISD), SOAS, London (20-21 July, 2007). Available online at http://www.cisd.soas.ac.uk/Editor/assets/prabirjitsarkar.pdf
Siems, M. (2005a), Numerical comparative law –do we need statistical evidence in order to reduce complexity?’Cardozo Journal of International and Comparative Law, 13: 521-540.
Siems, M. (2005b), ‘What does not work in comparing securities laws: a critique on La Porta et al.’s methodology’ International Company and Commercial Law Review 300-305.
Siems, M. (2006a)‘Shareholder protection across countries -is the EU on the right track?’ DICE-Report, Journal for Institutional Comparisons, 4/3: 39-43.
Siems, M (2006b) ‘Legal adaptability in Elbonia’ International Journal of Law in Context, 2: 393-408
Siems, M. (2007a) ‘Shareholder protection around the world: “Leximetric II”’, working paper, June 2007 (available online at http://ssrn.com/abstract=991092); forthcoming, Delaware Journal of Corporate Law).
Siems, M. (2007b), ‘Reconciling law & finance and comparative law’ McGill Law Journal, 52: 55-81.
Siems, M. (2008), Convergence in Shareholder Law (Cambridge: CUP).
Singh, Ajit, Singh, Alaka and Weisse, B. (2002), ‘Corporate governance, competition, the new international financial architecture and large corporations in emerging markets’ CBR Working Paper No.250, Centre for Business Research, University of Cambridge.
Spamann, H. (2006),‘On the insignificance and/or endogeneity of La Porta et al.’s “anti-director rights index” under consistent coding’, ECGI Law Working Paper No 67/2006.
Summers, L., 1998, ‘Opportunities out of crises: lessons from Asia’ remarks to the Overseas Development Council, from the Office of Public Affairs, March 19.
Teubner, G. (2001),‘Legal irritants: how unifying law ends up in new divergences’, in P. Hall and D. Soskice (eds.), Varieties of Capitalism (Oxford: OUP), 417-442.
Ventoruzzo, M.(2008) ‘Takeover regulation as a wolf in sheeps’clothing: taking Armour and Skeel’s thesis to continental Europe’ Bocconi Legal Studies Research Paper No. 2008-2. Available at SSRN: http://ssrn.com/abstract=1084429.