Law and Finance

Posted: 17 Nov 2009

See all articles by Rafael La Porta

Rafael La Porta

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Florencio Lopez-de-Silanes

Dongeui University

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Robert W. Vishny

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: 1998

Abstract

Examines the legal rules governing and providing protection for corporate shareholders and creditors. Since the defining feature of securities is the rights that they bring to their owners, legal rules and their enforcement are a major determinant of the success of corporate finance. A data set pertaining to the rights of investors, and to their enforcement, is statistically analyzed for 49 countries with publicly traded companies. The research suggests that laws vary considerably across countries because of a range of civil and common laws, though common laws offer better protection for investors. German-civil-law and Scandinavian countries have the best quality of law enforcement, French-civil-law systems protect investors least of all and have the least law enforcement, and in general, law enforcement improves with level of income. Countries with poor law enforcement develop substitute measures of investor protection, including mandatory dividends, legal reserve requirements, strong accounting standards and ownership concentration. The study concludes that rights are not inherent in securities, but are dependent upon the legal system. Overall, investors are given a limited amount of rights, and small, diversified shareholders in particular need legal protection to gain economic power. The study implies that countries with poor legal protection for investors often achieve less economic growth and financial development. (CJC)

Keywords: Legal protection, Shareholders, Investors, Public firms, Legal systems

Suggested Citation

La Porta, Rafael and Lopez-de-Silanes, Florencio and Shleifer, Andrei and Vishny, Robert W., Law and Finance (1998). Journal of Political Economy, Vol. 106, Issue 6, p. 1113-11 1998. Available at SSRN: https://ssrn.com/abstract=1505246

Rafael La Porta (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Florencio Lopez-de-Silanes

Dongeui University

176 Eomgwang-ro, Gaya
3(sam)-dong, Busanjin-gu
Busan
Korea, Republic of (South Korea)

Andrei Shleifer

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-5046 (Phone)
617-496-1708 (Fax)

HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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

HOME PAGE: http://www.ecgi.org

Robert W. Vishny

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
312-702-2522 (Phone)
312-702-0118 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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