IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Protection of minority interest and the development of security markets

Listed author(s):
  • Franco Modigliani

    (MIT Sloan School of Management, Cambridge, MA 02139, USA)

  • Enrico Perotti

    (University of Amsterdam and CEPR, Roeterstraat 11, 1018 WB Amsterdam, Netherlands)

While excessive regulation is an obstacle to the development of financial markets, we argue that lack of basic rules or poorly enforced regulation may explain the relative importance across countries of banking and security markets in financing firms. A selective or arbitrary enforcement transforms legal rules into an exclusionary good; arm's length market exchanges become unreliable. As a result, transactions tend to become intermediated through institutions or concentrated among agents bound by some form of private enforcement. Provision of funding shifts from risk capital to debt, and from markets to institutions with long term relations. Securities, as standardized arm's length contractual relationships, are most vulnerable to poor enforcement. We show that when small investors' rights are poorly protected, the ability of firms to raise equity capital is impaired, and as a result, profitable new ventures will be forsaken. This suggests a conflict of interest over regulatory standards between the controlling shareholders in listed firms and new entrepreneurs. More generally, fewer firms will be financed with outside equity, resulting in a low capitalization relative to GNP and a predominance of internal (unlisted) equity and bank lending over traded securities. We present some supporting evidence on the correlation between investor protection and development of security markets. We rely on a price measure, the premium on voting stock, which is related to the control premium. In countries where this premium is large, corporate financing is dominated by bank lending and equity markets are much smaller. Although the sample size is limited, the correlation is quite strong. © 1997 John Wiley & Sons, Ltd.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 18 (1997)
Issue (Month): 7-8 ()
Pages: 519-528

in new window

Handle: RePEc:wly:mgtdec:v:18:y:1997:i:7-8:p:519-528
DOI: 10.1002/(SICI)1099-1468(199711/12)18:7/8<519::AID-MDE857>3.0.CO;2-M
Contact details of provider: Web page:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wly:mgtdec:v:18:y:1997:i:7-8:p:519-528. 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-Blackwell Digital Licensing)

or (Christopher F. Baum)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.