The Real Difference in Corporate Law between the United States and Continental Europe: Distribution of Powers

Abstract

This paper challenges some common assumptions in comparative corporate law. It argues that differences in the degree of shareholder protection between common law and civil law countries are often overestimated, while some more fundamental corporate law differences remain overlooked. A milestone publication in this regard is the article of La Porta et al. entitled Law and Finance. The authors introduce an index to measure investor protection statistically and find that common law countries perform better on average than civil law countries. However, a broad array of legal sources reveals many mechanisms that interfere with, or substitute for, the mechanisms for shareholder protection used to construct the index. A recoding of the index to include these sources yields no significant differences between common law and civil law jurisdictions. This finding casts doubt on the received premise of recent research that common law jurisdictions offer better shareholder protection than civil law jurisdictions. It highlights instead the existence of a fundamentally different distribution of legal powers within U.S. and Continental European corporations. This paper shows that this difference shapes the functioning of the mechanisms of shareholder protection that comprise the index of La Porta et al. Furthermore, the difference in power distribution undermines the relationship they allege between shareholder protection and ownership structures and better explains in itself the differences in ownership structures, as well as many other aspects of corporate life.

JEL Classification: D70,G30,G32,G34,G38,F21,H26,H30,J50,M13,M14,K22