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Shareholder Protection, Stock Market Development, and Politics

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Author Info
Marco Pagano () (Università di Napoli Federico II, CSEF, CEPR and ECGI)
Paolo Volpin (London Business School)

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Abstract

This paper presents a political economy model where there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model’s predictions are tested on panel data for 47 countries over 1993-2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border M&A activity, consistent with the model.

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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 149.

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Date of creation: 01 Nov 2005
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Publication status: Published in the Journal of the European Economic Association, 2006, vol. 4, pages 315-41
Handle: RePEc:sef:csefwp:149

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Related research
Keywords: political economy; shareholder protection; corporate governance; stock market;

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Find related papers by JEL classification:
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Harvard Institute of Economic Research Working Papers 1788, Harvard - Institute of Economic Research.
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  2. Raghuram G. Rajan & Luigi Zingales, 2001. "The Great Reversals: The Politics of Financial Development in the 20th Century," NBER Working Papers 8178, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why are foreign firms listed in the U.S. worth more?," Journal of Financial Economics, Elsevier, vol. 71(2), pages 205-238, February. [Downloadable!] (restricted)
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  4. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," CSEF Working Papers 76, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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  5. Franklin Allen, 2005. "Corporate Governance in Emerging Economies," Oxford Review of Economic Policy, Oxford University Press, vol. 21(2), pages 164-177, Summer.
  6. Stulz, Rene M. & Williamson, Rohan, 2003. "Culture, openness, and finance," Journal of Financial Economics, Elsevier, vol. 70(3), pages 313-349, December. [Downloadable!] (restricted)
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  7. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March. [Downloadable!]
  9. Hellwig, Martin, 1998. "On the Economics and Politics of Corporate Finance and Corporate Control," Sonderforschungsbereich 504 Publications 98-43, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  10. Marco Pagano & Paolo Volpin, 1999. "The Political Economy of Corporate Governance," CSEF Working Papers 29, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jul 2005. [Downloadable!]
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  11. Cespa, Giovanni & Cestone, Giacinta, 2004. "Corporate Social Responsibility and Managerial Entrenchment," CEPR Discussion Papers 4648, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Miller, Darius P., 1999. "The market reaction to international cross-listings:: evidence from Depositary Receipts1," Journal of Financial Economics, Elsevier, vol. 51(1), pages 103-123, January. [Downloadable!] (restricted)
  13. Matías Braun & Claudio Raddatz, 2004. "Trade liberalization and the politics of financial development," Working Papers 04-3, Federal Reserve Bank of Boston. [Downloadable!]
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  14. Acemoglu, Daron, 2003. "Why not a political Coase theorem? Social conflict, commitment, and politics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 620-652, December. [Downloadable!] (restricted)
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  15. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December. [Downloadable!] (restricted)
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  16. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2002. "Law, Endowment, and Finance," NBER Working Papers 9089, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Arturo Bris & Christos Cabolis, 2008. "The Value of Investor Protection: Firm Evidence from Cross-Border Mergers," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 21(2), pages 605-648, April. [Downloadable!] (restricted)
  18. repec:rus:hseeco:72153 is not listed on IDEAS
  19. Enrico C. Perotti & Ernst-Ludwig von Thadden, 2004. "The Political Economy of Dominant Investors," Tinbergen Institute Discussion Papers 04-091/2, Tinbergen Institute. [Downloadable!]
  20. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March. [Downloadable!]
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  21. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank. [Downloadable!]
  22. Rossi, Stefano & Volpin, Paolo F., 2004. "Cross-country determinants of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 74(2), pages 277-304, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Korkeamäki, Timo & Koskinen, Yrjö & Takalo, Tuomas, 2007. "Phoenix rising: Legal reforms and changes in valuations in Finland during the economic crisis," Research Discussion Papers 1/2007, Bank of Finland. [Downloadable!]
    Other versions:
  2. Sonja Fagernas & Prabirjit Sarkar & Ajit Singh, 2007. "Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis," WEF Working Papers 0023, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
    Other versions:
  3. John Armour & Simon Deakin & Prabirjit Sarkar & Mathias Siems & Ajit Singh, 2007. "Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis," ESRC Centre for Business Research - Working Papers wp358, ESRC Centre for Business Research. [Downloadable!]
    Other versions:
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