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An end to consensus? the selective impact of corporate law reform on financial development

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  • Deakin, Simon
  • Sarkar, Prabirjit
  • Singh, Ajit

Abstract

Legal origins theory suggests that law reform,strengthening shareholder and creditor rights, should enhance financial development. We use recently created datasets measuring legal change over time in a sample of 25 developing, developed and transition countries to test this claim. We find that increases in shareholder protection contribute to stock market growth in the common law world and in developing countries, but not in the civil law world. We also find evidence of reverse causation, with financial development triggering legal changes in the developing world. We consider a number of reasons for the selective impact of law reform, focusing on the endogeneity of the legal system to its economic context, and on resulting complementarities between legal and financial institutions. JEL Codes: G33, G34, K22, O16.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39047.

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Date of creation: Jun 2011
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Handle: RePEc:pra:mprapa:39047

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Keywords: legal origins; company law; shareholder rights; creditor rights; financial development;

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  1. Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2005. "The Law and Economics of Self-Dealing," NBER Working Papers 11883, National Bureau of Economic Research, Inc.
  2. Sarkar, Prabirjit & Singh, Ajit, 2009. "Law, Finance and Development: Further Analyses of Longitudinal Data," MPRA Paper 39060, University Library of Munich, Germany.
  3. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc.
  4. Sonja Fagernäs & Prabirjit Sarkar & Ajit Singh, 2007. "Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp343, ESRC Centre for Business Research.
  5. Mathias Siems, 2007. "Shareholder Protection around the World ("Leximetric II")," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp359, ESRC Centre for Business Research.
  6. Armour, John & Deakin, Simon & Sarkar, Prabirjit & Siems, Mathias & Singh, Ajit, 2007. "Shareholder protection and stockmarket development: an empirical test of the legal origins hypothesis," MPRA Paper 39055, University Library of Munich, Germany.
  7. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 285-332, June.
  8. Rafael LaPorta & Florencio Lopez-de-Silane & Cristian Pop-Eleches & Andrei Shleifer, 2003. "Judicial Checks and Balances," NBER Working Papers 9775, National Bureau of Economic Research, Inc.
  9. Klaus Gugler & Dennis C. Mueller & B. Burcin Yurtoglu, 2004. "Corporate Governance and Globalization," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 20(1), pages 129-156, Spring.
  10. Armour, J. & Deakin, S. & Mollica, V. & Siems, M.M., 2010. "Law and Financial Development: What we are learning from time-series evidence," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp399, ESRC Centre for Business Research.
  11. Sarkar, Prabirjit, 2007. "Stock Market Development and Capital Accumulation: Does Law Matter? A Case Study of India," MPRA Paper 5052, University Library of Munich, Germany.
  12. Deakin, Simon & Demetriades, Panicos & James, Gregory A., 2010. "Creditor protection and banking system development in India," Economics Letters, Elsevier, Elsevier, vol. 108(1), pages 19-21, July.
  13. Williamson, John, 2000. "What Should the World Bank Think about the Washington Consensus?," World Bank Research Observer, World Bank Group, World Bank Group, vol. 15(2), pages 251-64, August.
  14. Reinhard H. Schmidt & Gerald Spindler, 2002. "Path Dependence, Corporate Governance and Complementarity," Working Paper Series: Finance and Accounting, Department of Finance, Goethe University Frankfurt am Main 27, Department of Finance, Goethe University Frankfurt am Main.
  15. John Armour & Simon Deakin & Priya Lele & Mathias Siems, 2009. "How Do Legal Rules Evolve? Evidence from a cross-country Comparison of Shareholder, Creditor and Worker Protection," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp382, ESRC Centre for Business Research.
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Cited by:
  1. Deakin, S. & Sarkar, P., 2011. "Indian Labour Law and its Impact on Unemployment, 1970-2006: A leximetric study," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp428, ESRC Centre for Business Research.

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