The Evolution of Malaysian Shareholder Protection: A Legal Origins Analysis

Abstract

In the aftermath following the Asian financial crisis, the World Bank prescribed regulatory reforms as a remedy for weak financial fundamentals. These reforms reflect the claims of the strong form legal origins hypothesis that countries with common law legal traditions have stronger investor protection laws and better financial outcomes than countries of civil law origin. This paper seeks to test the legal origins hypothesis through an examination of the evolution of Malaysian shareholder protection from 1965 to 2010. Comparison with six other countries in the time series studies indicates that Malaysia had the highest growth in formal shareholder protection. Persistent borrowing from the regulations of other common law countries suggests that inherited legal tradition has, to an extent, influenced the evolution of Malaysian shareholder protection. The influence of other common law countries’ regulations is explained by institutional complementarities, supporting the claims of the weak form legal origins hypothesis.