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

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 and a number of sceptical views. It outlines 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 one. Furthermore, the conclusion that a common legal tradition implies a similar set of legal rules and procedures to protect financial investors does not hold empirically. Also, later 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. The claim that creditor protection is largely determined by legal tradition has thus to be reconsidered.