Shareholder Protection, Stock Market Development, and Politics

40 Pages Posted: 23 Nov 2005

See all articles by Marco Pagano

Marco Pagano

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Paolo F. Volpin

Drexel University - Bennett S. LeBow College of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); City University London - Faculty of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 2005

Abstract

This paper presents a political economy model where there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model's predictions are tested on panel data for 47 countries over 1993-2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border M&A activity, consistent with the model.

Keywords: political economy, shareholder protection, corporate governance, stock market development

JEL Classification: G34, K22, K42

Suggested Citation

Pagano, Marco and Volpin, Paolo F., Shareholder Protection, Stock Market Development, and Politics (November 2005). ECGI - Finance Working Paper No. 105/2005, Available at SSRN: https://ssrn.com/abstract=853005 or http://dx.doi.org/10.2139/ssrn.853005

Marco Pagano (Contact Author)

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

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Rome, 00187
Italy

Research Institute of Industrial Economics (IFN)

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Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

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1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Paolo F. Volpin

Drexel University - Bennett S. LeBow College of Business ( email )

101 N. 33rd St.
Philadelphia, PA 19104
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

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