‘Law and Finance’: Inaccurate, Incomplete, and Important

16 Pages Posted: 18 Dec 2009

See all articles by Ruth V. Aguilera

Ruth V. Aguilera

Northeastern University - Department of International Business and Strategy

Cynthia A. Williams

York University - Osgoode Hall Law School

Date Written: December 15, 2009


La Porta, Lopez-de-Silanes, Shleifer and Vishny’s (LLSV) purported demonstration in Law and Finance (1998) of a correlation between the legal origins of a country and its stock market development and ownership dispersion, mediated through the protection of minority shareholders as against directors, has been subjected to enough further, careful analysis that we can see both the inaccuracies of their views, but also the importance of their research.

In this Essay, we suggest that economic sociology has much to add to the understanding of the implications derived from raw facts of ownership patterns within countries. There are provocative hints that companies with controlling shareholders can actually outperform companies with dispersed shareholders, contingent on the nature of the owners (family, state, bank, parent company, etc.), the type of industrial sector, the stage of the firm’s life cycle, and the other institutional arrangements in the country. Putting ownership patterns on the agenda of academic inquiry was clearly an important contribution by LLSV. Understanding what those patterns imply about firm performance, within different institutional arrangements and complementarities, is yet to be fully addressed, either in their work or in comparative corporate governance generally.

We also suggest that it is important to understand the contributions of legal origins to positive economic measures of a country’s health, fully conceived. Financial measures alone, such as measures of stock market capitalization per GDP, do not suffice to provide that understanding. In light of the collapse of innovative financialization over the past year, and the resulting global recession, we should re-examine LLSV’s fundamental conceptions – and perhaps misconceptions – of the value of stock market capitalization per se as a measure of healthy economics.

Keywords: Law and finance, corporate governance, economic sociology, law and development, firm ownership structure

JEL Classification: A13, A14, G15, G18, G32, G38, K22, L20, L21, L51, M14, N20

Suggested Citation

Aguilera, Ruth V. and Williams, Cynthia A., ‘Law and Finance’: Inaccurate, Incomplete, and Important (December 15, 2009). Brigham Young University Law Review, Forthcoming, U Illinois Law & Economics Research Paper No. LE10-002, Illinois Public Law Research Paper No. 09-20, Available at SSRN: https://ssrn.com/abstract=1523895

Ruth V. Aguilera

Northeastern University - Department of International Business and Strategy ( email )

Boston, MA 02115
United States

Cynthia A. Williams (Contact Author)

York University - Osgoode Hall Law School ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
416-736-5545 (Phone)

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