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Law, Finance and the First Corporations

Ron Harris

Tel Aviv University - Buchmann Faculty of Law

January 20, 2009

GLOBAL PERSPECTIVES ON THE RULE OF LAW, James J. Heckman, Robert L. Nelson, L. Cabatingan, eds., Abingdon: Routledge-Cavendish, 2009

The English East India Company (EIC) and the Dutch East India Company (VOC) were incorporated by State charters two years apart, in 1600 and 1602 respectively. They were involved in similar business activities. They were both organized as joint stock corporations, with huge capital and hundreds of shareholders. The formation of the companies was situated in a crucial junction in the history of business organizations and stock markets. Yet, while the formation of the VOC led to the appearance of a secondary market in shares in the Dutch Republic, in England a share market emerged only a century after the organization of the EIC.

The present article shall focus on a main organizational challenge faced by the two companies, the facilitation of long-term impersonal cooperation between active entrepreneurs and passive investors. It will study the manners by which legal and political environmental factors were translated into the detailed financial and governance structure of each of the two companies. It will explain the distinct English and Dutch paths to the creation of share markets through these environmental and organizational differences.

My approach and case study will be encountered with three influential, theoretically oriented, approaches to the relationship between law and institutions and the development of the stock market. The approaches are those of Schleifer and his collaborators that emphasize the effect of legal origins on investor protection, of North and Weingast that view the ability of the State to convey credible commitments as a key to the development of stock markets and of Rajan and Zingales that focus on market infrastructure and on the power of social and interest groups. The purpose of this encounter is twofold; first, to enrich our understanding of the reasons for the historical divergence between the two countries; and second, to analyze these leading theories in light of the empirical findings of our pivotal case study.

Number of Pages in PDF File: 43

Keywords: East India Company, Stock Market, Institutions, Eurasian Trade, England, Dutch Republic, History

JEL Classification: F10, G10, G30, K22, N23, N43, N45, N73, N75, N80

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Date posted: January 21, 2009  

Suggested Citation

Harris, Ron, Law, Finance and the First Corporations (January 20, 2009). GLOBAL PERSPECTIVES ON THE RULE OF LAW, James J. Heckman, Robert L. Nelson, L. Cabatingan, eds., Abingdon: Routledge-Cavendish, 2009. Available at SSRN: https://ssrn.com/abstract=1330459

Contact Information

Ron Harris (Contact Author)
Tel Aviv University - Buchmann Faculty of Law ( email )
Ramat Aviv
Tel Aviv 69978, IL
972 3 6408798 (Phone)
972 3 6407260 (Fax)
HOME PAGE: http://www2.tau.ac.il/Person/law/researcher.asp?id=agihecicf
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