Investor Protection and Capital Market Regulation in Germany

Abstract

La Porta et al. have shown that differences among countries in legal codes and enforcement of investor protection account for much of the disparity in the size and development of their financial markets. According to their empirical measure of shareholder protection, Germany scores only one out of five possible points on an aggregated index scale.

This paper argues that today this assessment is no longer correct, because Germany has reformed its capital market regulation in ways that now afford much greater shareholder protection. In four sections, the paper examines these developments and their effect on changes in corporate governance and investor protection to date. After the introduction some stylized quantitative facts about the development in German equity markets are presented. The second section, which constitutes the main part, covers formal legal changes in corporate governance and investor protection that have a profound effect on the German equity markets. The third section discusses the emergence of a German market for corporate control. The final section concludes.

Keywords: Investor Protection, Corporate Governance, Capital Market Regulation, Law and Finance, German Financial System

JEL Classification: G3, K22, G15