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Legal origin and financial development: new evidence for old claims? The creditor rights index revisited

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Author Info
Michael Graff () (KOF Swiss Economic Institute, ETH Zurich)

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Abstract

The "law and finance theory" predicts that the common law system provides the best basis for financial development and economic growth, followed by Scandinavian and German origin civil law and finally French origin civil law. This paper summarises the key points of the theory as well as a number of sceptical views. Moreover, it argues that the theory faces an identification problem, since the majority of common law countries have a market-based financial system, whereas the majority of civil law countries have a bank-based financial system. Furthermore, it is shown that one of the corner stones of the law and finance theory, its proposition that a common legal tradition implies a similar set of legal rules and procedure to protect financial investors, does not hold empirically. Last but not least, it is shown that recent additions to the theory's creditor right indicators data pool are eliminating the (weak) correspondence between business law and legal family that could be found in the original data set. Accordingly, the theory's claim that creditor protection is largely determined by the legal tradition of a particular country has to be reconsidered.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 08-197.

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Length: 21 pages
Date of creation: Apr 2008
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Handle: RePEc:kof:wpskof:08-197

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Related research
Keywords: Legal Tradition; Creditor Rights;

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Find related papers by JEL classification:
K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law
G20 - Financial Economics - - Financial Institutions and Services - - - General
P00 - Economic Systems - - General - - - General

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  3. Claessens, Stijn & Laeven, Luc, 2002. "Financial development, property rights, and growth," Policy Research Working Paper Series 2924, The World Bank. [Downloadable!]
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  4. Michael Graff, 2005. "Law and Finance: Common-law and Civil-law Countries Compared," KOF Working papers 05-99, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
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  16. 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, vol. 117(4), pages 1231-1294, November. [Downloadable!] (restricted)
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