Law and Finance in Emerging Economies: Germany and Britain 1800-1913

Abstract:     

By most standards, Britain in the 19th century was the leading financial nation in the world, possessing more developed capital markets than any other country. An influential view in the law and finance literature argues that holding macroeconomic factors constant, this difference in financial development can be attributed to more stringent disclosure regulation in Britain. This article compares Britain with another European country that was at the centre of the industrial transformation in the 19th century: Germany. It presents a more granular analysis of regulatory reform than is available elsewhere in the literature and presents findings that are, in several respects, at variance with the orthodox view in law and finance. The level of disclosure regulation was largely comparable in both countries during the period under investigation. Furthermore, reform of disclosure regulation was not an exogenous stimulus of financial development, but evolved incrementally and in response to changing market conditions. This was different with respect to the legal regime governing the formation of stock corporations. Here, the two countries developed in diametrically opposed directions as a result of concerted efforts by the policy maker to effect changes in market conditions. The article argues that these rules stand out as the most striking difference between Germany and the UK, a difference that was relevant to organisational choice and types of finance available to the entrepreneur.

Number of Pages in PDF File: 41

Keywords: Law and finance; financial development; disclosure regulation; private enforcement; liability for incorrect disclosures

JEL Classification: G38, K22, N43, P51