Can Civil Law Countries Get Good Institutions? Lessons from the History of Creditor Rights and Bond Markets in Brazil

Abstract

Does a legal tradition adopted in the distant past constrain a country's ability to provide the protection that investors need for financial markets to develop? This paper contributes to the literature that studies the connection between law and finance by looking at the relationship between legal origin and the development of bond markets. The paper shows that there is too much variation over time in terms of bond market size, creditor protections, and court enforcement of bond contracts to assume that the adoption of a legal system can constrain future financial development. The paper examines in detail the evolution of bond markets in Brazil, a French civil law country, and provides preliminary results of similar variation for a small cross-section of countries.

Keywords: law and finance, legal origins, bankruptcy, Brazil, bond markets

JEL Classification: G38, G33, K22, N26, N20