Law of Incorporation and Ownership Structure: The Law and Finance Theory Revisited

Abstract

The theory of law and finance proposed by La Porta et al. (1998) predicts that minority controlled ownership structures, i.e. the structures that allow voting rights to exceed cash-flow rights, are more frequent in legal contexts where investors are not well protected against the expropriation attempts orchestrated by controlling shareholders. The purpose of our study is to test this prediction in a unique environment, that of the province of Quebec. Quebec's distinct status hinges on the fact that it is a Civil Law jurisdiction in a country, Canada, which is made up of nine other provinces with a Common Law tradition. Overall, the results support the theory. Quebec's Civil Law tradition appears to lead to a greater concentration of voting rights and a wider separation between voting rights and ownership rights.

Keywords: Ownership structure, law and finance, private benefits of control

JEL Classification: G32, G34