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Law and Finance: Common-law and Civil-law Countries Compared

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  • Michael Graff

    ()
    (KOF Swiss Economic Institute, ETH Zurich)

Abstract

The "law and finance theory" is an ambitious and fascinating attempt to combine insights from the theory of corporate finance, institutional economics, legal and economic history as well as the recent studies on the determinants of economic growth into an encompassing theory, thereby filling important gaps of our understanding of the ultimate causes and linkages underlying modern economic development. It argues that the legal system, which today's countries inherited from the past, is crucial in the way it is favouring – or hampering – financial development. The major conclusion of this literature is that the common law system generally provided the more favourable basis for financial development and economic growth, and on the other hand, the French branch of the civil law tradition is the least favourable in this respect. This paper identifies a number of problems that cast serious doubt on the soundness of the empirical basis generally referred to in this literature. However, our analyses support the idea that the legal tradition has pronounced effects with respect to shareholder protection. In particular, while a critical look at the indicators revealed that there is not much evidence that common law countries protect financial investors better than civil law countries, we find support for the view that investors are treated differently.

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Bibliographic Info

Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 05-99.

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Length: 27 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:kof:wpskof:05-99

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  1. Thorsten Beck & Ross Levine, 2003. "Legal Institutions and Financial Development," NBER Working Papers 10126, National Bureau of Economic Research, Inc.
  2. Singh, Ajit & Singh, Alaka & Weisse, Bruce, 2002. "Corporate Governance, Competetion, The new International Financial Architecture and Large Corporations in Emerging Markets," MPRA Paper 24305, University Library of Munich, Germany.
  3. 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.
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    • Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  5. Daron Acemoglu & Simon Johnson & James A. Robinson, 2002. "Reversal Of Fortune: Geography And Institutions In The Making Of The Modern World Income Distribution," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1231-1294, November.
  6. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, American Economic Association, vol. 91(5), pages 1369-1401, December.
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Cited by:
  1. Michael Graff, 2006. "Myths and Truths: The «Law and Finance Theory» Revisited," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 06-122, KOF Swiss Economic Institute, ETH Zurich.
  2. Michael Graff, 2008. "Legal origin and financial development: new evidence for old claims? The creditor rights index revisited," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 08-197, KOF Swiss Economic Institute, ETH Zurich.
  3. Olga Pogrebennyk, 2014. "Code or court: the financial-political aspect of correlation between common and civil law," European Journal of Law and Economics, Springer, Springer, vol. 37(2), pages 175-181, April.
  4. Jérôme Sgard, 2006. "Do legal origins matter? The case of bankruptcy laws in Europe 1808–1914," Sciences Po publications info:hdl:2441/6824, Sciences Po.

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