Why Investor Protection is Not All That Matters in Corporate Law and Economics
Alessio M. Pacces
Erasmus School of Law, Erasmus University Rotterdam - Rotterdam Institute of Law and Economics; European Corporate Governance Institute
The Icfai University Journal of Corporate and Securities Law, Vol. VI, No. 2, pp. 8-28, May 2009
RILE Working Paper Series No. 2009/03
The standard approach to the legal foundations of corporate governance is based on the 'law matters' thesis, according to which corporate law promotes separation of ownership and control by protecting minority shareholders from expropriation. This paper takes a broader perspective on the economic and legal determinants of corporate governance. It shows that investor protection is a necessary, but not sufficient, legal condition for efficient separation of ownership and control. Supporting control powers vested in managers or controlling shareholders is at least as important as protecting investors from their abuse. Corporate law does not only matter in the last respect; it matters in both. This result is derived by interpreting corporate governance based on three categories of private benefits of control. Corporate law affects corporate governance depending on its impact on each category of private benefits, and not just on those accounting for shareholder expropriation. Three major areas of corporate law are considered with this view. The first is the legal distribution of corporate powers. The second is the discipline of related-party transactions. The third is regulation of control transactions. The three areas are investigated comparatively in the US, the UK, Italy, Sweden, and the Netherlands. The investigation shows that, when corporate law is analyzed in this fashion, it explains the different patterns and performance of corporate governance. This account of corporate law is not only useful for understanding separation of ownership and control, but also for indicating how to improve its efficiency through legal intervention.
Number of Pages in PDF File: 28
JEL Classification: G34, K22, K42, L26, O16Accepted Paper Series
Date posted: February 22, 2010
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