Law and Finance: Why Does Legal Origin Matter?

44 Pages Posted: 10 Feb 2003

See all articles by Thorsten Beck

Thorsten Beck

City University London - The Business School; Tilburg University - European Banking Center, CentER

Asli Demirgüç-Kunt

World Bank

Ross Levine

Stanford University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 2002

Abstract

A growing body of work suggests that cross-country differences in legal origin help explain differences in financial development. Beck, Demirguc-Kunt, and Levine assess two theories of why legal origin influences financial development. First, the "political" channel stresses that (1) legal traditions differ in the priority they give to the rights of individual investors compared with the state, and that (2) this has repercussions for the development of property rights and financial markets. Second, the "adaptability" channel holds that (1) legal traditions differ in their ability to adjust to changing commercial circumstances, and (2) legal systems that adapt quickly to minimize the gap between the contracting needs of the economy and the legal system's capabilities will foster financial development more effectively than would more rigid legal traditions. The authors use historical comparisons and cross-country regressions to assess the validity of these two channels.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the determinants of financial development.

JEL Classification: G2, K2, K4, O16, P5

Suggested Citation

Beck, Thorsten and Demirgüç-Kunt, Asli and Levine, Ross, Law and Finance: Why Does Legal Origin Matter? (November 2002). Available at SSRN: https://ssrn.com/abstract=355820

Thorsten Beck

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Asli Demirgüç-Kunt

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Ross Levine (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States