Law and Finance

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