An end to consensus? the selective impact of corporate law reform on financial development

Deakin, Simon and Sarkar, Prabirjit and Singh, Ajit (2011): An end to consensus? the selective impact of corporate law reform on financial development. Published in: Centre for Business Research Working Paper Series No. WP423 (June 2011)

Abstract

Legal origins theory suggests that law reform,strengthening shareholder and creditor rights, should enhance financial development. We use recently created datasets measuring legal change over time in a sample of 25 developing, developed and transition countries to test this claim. We find that increases in shareholder protection contribute to stock market growth in the common law world and in developing countries, but not in the civil law world. We also find evidence of reverse causation, with financial development triggering legal changes in the developing world. We consider a number of reasons for the selective impact of law reform, focusing on the endogeneity of the legal system to its economic context, and on resulting complementarities between legal and financial institutions.

JEL Codes: G33, G34, K22, O16.

• Item Type: MPRA Paper
• Language: English
• Keywords: legal origins, company law, shareholder rights, creditor rights, financial development
• Subjects: K - Law and Economics > K2 - Regulation and Business Law > K22 - Business and Securities Law; G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; O - Economic Development, Innovation, 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 > G33 - Bankruptcy ; Liquidation

References

References

Ahlering, B. and Deakin, S. (2007) ‘Labour regulation, corporate governance and legal origin: a case of institutional complementarity?’ Law & Society Review, 41 : 865-98.

Aoki, M. (2001) Towards a Comparative Institutional Analysis (Cambridge,MA : MIT Press).

Aoki, M. (2010) Corporations in Evolving Diversity (Oxford : Oxford University Press).

Armour, J., Deakin, S., Sarkar, P., Siems, M. and Singh, A. (2009a) ‘Shareholder protection and stock market development: an empirical test of the legal origins hypothesis’ Journal of Empirical Legal Studies, 6: 343-381.

Armour, J., Deakin, S., Lele, P. and Siems, M. (2009b) ‘How legal norms evolve: evidence from a cross-country comparison of shareholder, creditor and worker protection’ American Journal of Comparative Law, 57: 579-629.

Armour, J., Deakin, S., Mollica, V. and Siems, M. (2009c) ‘Law and financial development: what we are learning from time-series evidence’ BYU Law Review: 1435-1500.

Armour, J., with Mollica, V., Siems, M., Lele, P., Zhou, T., Hirooka, K., Klauberg, T., Heidenhain, S., Cankar, N., Hamilton, J., and Akman, P. (2009d) CBR Extended Creditor Protection Index, Cambridge: Centre for Business Research, available at: http://www.cbr.cam.ac.uk/research/programme2/project2-output.htm.

Armour, J. and Lele, P. (2009) ‘Law, finance and politics: the case of India’ Law & Society Review, 43: 491-526.

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.

Buchanan, J. and Deakin, S. (2008) ‘Japan’s paradoxical response to the new “global standard” in corporate governance’ Zeitschrift für Japanisches Recht, 13(26): 59-84.

Cankar, N., Deakin, S. and Simoneti, M. (2010) ‘The reflexive properties of corporate governance codes: the reception of the “comply or explain” approach in Slovenia’ Journal of Law and Society, 37: 501-25.

Cheffins, B. (2001) ‘Does law matter? The separation of ownership and control in the United Kingdom’ Journal of Legal Studies, 30: 459-84.

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.

Deakin, S. and Carvalho, F. (2011) ‘System and evolution in corporate governance’, in P. Zumbansen and G. P. Calliess (eds.), Law, Economics and Evolutionary Theory (Cheltenham: Edward Elgar).

Deakin, S., Demetriades, P. and James, G. (2010) ‘Creditor rights and banking system development in India’ Economics Letters, 108: 19-21.

Djankov, S., La Porta, 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., La Porta, R., Lopez de Silanes, F., Shleifer, A. (2005) ‘The law and economics of delf-dealing’ NBER Working Paper No. W11883.

Djankov, S., McLeish, C., and Shleifer, A. (2007a) ‘Private credit in 129 countries’ Journal of Financial Economics, 84: 299-329.

Djankov, S., Hart, O., McLeish, C., and Shleifer, A. (2007b) ‘Debt enforcement around the world’ ECGI Finance Working Paper No 147/2007.

Djankov, S., La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (2008) ‘The law and economics of self-dealing’ Journal of Financial Economics, 88: 430

Fagernäs, S., Sarkar, P., and Singh, A. (2008) ‘Legal origin, shareholder protection and the stock market: new challenges from time series analysis’, in B. Yurtoglu and K. Gugler (eds.), The Economics of Corporate Governance and Mergers (Cheltenham: Edward Elgar).

Glaeser, E. and Shleifer A. (2002) ‘Legal origins’ Quarterly Journal of Economics, 117: 1193-1229.

Glen, J. and Singh, A. (2003) ‘Capital structure, rates of return and financing corporate growth: comparing developed and emerging markets, 19942000’ Emerging Markets Review, 5: 161-192.

Gugler, K., Mueller, D. and Yurtoglu, B. (2004) ‘Corporate governance and globalisation’ Oxford Review of Economic Policy, 20: 129-156.

Jensen, M. (2005) ‘The agency costs of overvalued equity’ Financial Management, 34: 5-19.

Kraakman, R., Armour, J., Davies, P., Hansmann, H., Hertig, G., Kanda, H.,Hopt, K. and Rock, E., eds. (2009) The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford: Oxford University Press, 2nd. ed.).

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., Shleifer, A. and Vishny, R. (1999) ‘Corporate ownership around the world’ Journal of Finance, 54: 471

La Porta, R., Lopez-de-Silanes, F., Pop-Eleches, C. and Shleifer, A. (2004)‘Judicial checks and balances’ Journal of Political Economy, 112: 445

La Porta R., Lopez-de-Silanes F., and Shleifer, A. (2006) ‘What works in securities laws?’ Journal of Finance, 61: 1-32.

La Porta R., Lopez-de-Silanes F., and Shleifer A. (2008) ‘The economic consequences of legal origins’ Journal of Economic Literature, 46: 285

Levine, R. (1999) ‘Law, finance and growth’ Journal of Financial Intermediation, 8: 8-35.

North, D. (1990) Institutions, Institutional Change, and Economic Performance Cambridge: CUP).

OECD (2004) Principles of Corporate Governance (Paris: OECD).

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.

Rodrik, D. (2006) ‘Goodbye Washington consensus, hello Washington confusion?’ Journal of Economic Literature, 44: 969-983.

Sarkar, P. (2009) ‘Corporate governance, stock market development and private capital accumulation: a case study of India’, in S. Marjit (ed.), India Macroeconomics Annual (New Delhi: Sage).

Sarkar, P. and Singh, A. (2010) ‘Law, finance and development: further analyses of longitudinal data’ Cambridge Journal of Economics, 34: 325

Schmidt, R., and Spindler, G. (2002) ‘Path dependence, corporate governance and complementarity’ International Finance, 5: 311-33.

Siems, M. (2008) ‘Shareholder protection around the world: “Leximetric II”’ Delaware Journal of Corporate Law, 33: 111-37.

Siems, M., with Lele, P., Iglesias-Rodriguez, P., Mollica, V., Klauberg, T., Heidenhain, S., Cankar, N., Hamilton, J., Schnyder, G. and Akman, P.(2009) CBR Extended Shareholder Protection Index, Cambridge: Centre for Business Research, available at: http://www.cbr.cam.ac.uk/research/programme2/project2-output.htm.

Singh, A. (1993) ‘The stock market and economic development: should developing countries encourage stock markets?’, UNCTAD Review, 4: 1

Singh, A. (1995) ‘Corporate financial patterns in industrialising economies: a comparative international study’, IFC Technical Paper No 2.

Spamann, H. (2010) ‘The “Antidirector Rights Index” revisited’, Review of Financial Studies, 23: 467- 486.

Williamson, J. (2000) ‘What should the World Bank think about the Washington consensus?’ World Bank Research Observer, 15: 251-264.

World Bank (various years) Doing Business Report (Washington, DC: International Bank for Reconstruction and Development).

Zweigert, K., and Kötz, H. (1998) An Introduction to Comparative Law (T.Weir trans.), (Oxford: OUP, 3rd. ed.).