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Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis


John Armour


University of Oxford - Faculty of Law; University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Simon Deakin


University of Cambridge - Centre for Business Research (CBR); European Corporate Governance Institute (ECGI); University of Cambridge - Faculty of Law

Prabirjit Sarkar


Jadavpur University

Mathias M. Siems


Durham University - Durham Law School; University of Cambridge - Centre for Business Research

Ajit Singh


University of Cambridge

May 2008

University of Cambridge, CBR Working Paper
ECGI - Law Working Paper No. 108/2008

Abstract:     
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 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 stock-trading 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 expected; and, more generally, the exogenous legal origin effect is not as strong as widely supposed.

Number of Pages in PDF File: 53

Keywords: law and finance, shareholder rights, corporate governance, corporate finance, legal origins, comparative law

JEL Classification: G32, K22, N20, O16, P50

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Date posted: February 20, 2008 ; Last revised: November 17, 2010

Suggested Citation

Armour, John and Deakin, Simon and Sarkar, Prabirjit and Siems, Mathias M. and Singh, Ajit, Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis (May 2008). University of Cambridge, CBR Working Paper; ECGI - Law Working Paper No. 108/2008. Available at SSRN: http://ssrn.com/abstract=1094355 or http://dx.doi.org/10.2139/ssrn.1094355

Contact Information

John Armour
University of Oxford - Faculty of Law ( email )
Oriel College
Oxford, OX1 4EW
United Kingdom
+44 1865 286544 (Phone)
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Simon F. Deakin
University of Cambridge - Centre for Business Research (CBR) ( email )
Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+ 44 1223 335243 (Phone)
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
University of Cambridge - Faculty of Law ( email )
10 West Road
Cambridge, CB3 9DZ
United Kingdom

Prabirjit Sarkar
Jadavpur University ( email )
Economics Department
Calcutta, 700032
India
HOME PAGE: http://prabirjit.blogspot.com/
Mathias M. Siems (Contact Author)
Durham University - Durham Law School ( email )
50 North Bailey
Durham, County Durham DH1 3ET
United Kingdom
HOME PAGE: http://www.dur.ac.uk/mathias.siems
University of Cambridge - Centre for Business Research ( email )
Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom
HOME PAGE: http://www.cbr.cam.ac.uk/about_us/siems.htm
Ajit Singh
University of Cambridge ( email )
Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+ 44 1223 350434 (Phone)
+ 44 1223 740479 (Fax)
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