IDEAS home Printed from
   My bibliography  Save this article

Security Markets versus Bank Finance: Legal Enforcement and Investors' Protection


  • Franco Modigliani
  • Enrico Perotti


When minority investors’ rights are poorly protected, the ability of firms to raise equity capital is impaired, leading to less finance for new ventures. Fewer firms will be financed with outside equity, resulting in a low market capitalization relative to GNP. External funding requires easily enforceable claims such as debt or requires long‐term relationships with institutions. Provision of funding shifts from risk capital to debt, and to a predominance of intermediated over market finance. We report supporting evidence for a few countries. To measure investor protection, we use a price measure, the premium on voting stock, related to the control premium. In countries where the voting premium is large, corporate financing is dominated by bank lending and equity markets are much smaller.

Suggested Citation

  • Franco Modigliani & Enrico Perotti, 2000. "Security Markets versus Bank Finance: Legal Enforcement and Investors' Protection," International Review of Finance, International Review of Finance Ltd., vol. 1(2), pages 81-96, June.
  • Handle: RePEc:bla:irvfin:v:1:y:2000:i:2:p:81-96
    DOI: 10.1111/1468-2443.00006

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:irvfin:v:1:y:2000:i:2:p:81-96. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.