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Market- vs. bank-based financial systems: do investor rights really matter?

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  • Ozgur Emre Ergungor

Abstract

Why are common-law countries market-dominated and civil-law countries bank-dominated when either financial structure can promote economic growth? This paper provides an explanation tied to legal traditions. Civil-law courts have been less effective in resolving conflicts than common-law courts because civil-law judges traditionally refrain from interpreting the codes and creating new rules. Banks can induce borrowers to honor their obligations by threatening to withhold services that only banks can provide.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0101R.

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Date of creation: 2002
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Handle: RePEc:fip:fedcwp:0101

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Keywords: Comparative law ; Financial markets;

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References

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  1. O. Emre Ergungor, 2001. "Theories of loan commitments: a literature review," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q III, pages 2-19.
  2. Allen, Franklin & Gale, Douglas, 1998. "Diversity of Opinion and Financing of New Technologies," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-29, C.V. Starr Center for Applied Economics, New York University.
  3. Raghuram G. Rajan & Luigi Zingales, 2000. "The Great Reversals: The Politics of Financial Development in the 20th Century," OECD Economics Department Working Papers 265, OECD Publishing.
  4. Ross Levine, 1998. "The legal environment, banks, and long-run economic growth," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Aug, pages 596-620.
  5. Stewart C. Myers & Raghuram G. Rajan, 1995. "The Paradox of Liquidity," NBER Working Papers 5143, National Bureau of Economic Research, Inc.
  6. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 8(1-2), pages 8-35, January.
  7. Franklin Allen & Douglas Gale, 1994. "A welfare comparison of intermediaries and financial markets in Germany and the U.S," Working Papers 95-3, Federal Reserve Bank of Philadelphia.
  8. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 559-86, June.
  9. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(3), pages 1131-50, July.
  10. Boot, A.W.A. & Thakor, A.V. & Udell, G.F., 1987. "Credible commitments, contract enforcement problems and banks: Intermediation as credibility assurance," Research Memorandum, Tilburg University, Faculty of Economics and Business Administration 282, Tilburg University, Faculty of Economics and Business Administration.
  11. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
  12. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 33-73, 02.
  13. Boot, Arnoud W A & Greenbaum, Stuart I & Thakor, Anjan V, 1993. "Reputation and Discretion in Financial Contracting," American Economic Review, American Economic Association, American Economic Association, vol. 83(5), pages 1165-83, December.
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Cited by:
  1. IANCU, Aurel, 2013. "Extending Financialisation and Increasing Fragility of the Financial System," Working Papers of National Institute of Economic Research, National Institute of Economic Research 130307, National Institute of Economic Research.
  2. Iancu, Aurel, 2013. "Financialisation: Structure, Extent, Consequences," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 172-192, June.

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