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Law and finance in transition economies

Listed author(s):
  • Katharina Pistor

    (Max Planck Institute for Foreign and International Private Law, Hamburg)

  • Martin Raiser

    (European Bank for Reconstruction and Development)

  • Stanislav Gelfer

    (European Bank for Reconstruction and Development)

This paper offers a first comprehensive analysis of legal change in shareholder and creditor rights protection in transition economies and its impact on the propensity of firms to raise external finance. The paper uses the investor rights indices developed by La Porta et al. (1998) as a starting point, but expands them to capture a greater range of potential conflicts between different stakeholders of the firm.It supplements the analysis of the law on the books with an analysis of the effectiveness of legal institutions (legality). For assessing financial market development we use common measures of stock and credit market development. We find that external finance is still very underdeveloped in transition economies, despite legal change that has substantially improved shareholder and creditor rights. The only legal index with a significant positive impact on capital market development is the index that codes securities legislation (SMINTEGR). There is also some indication that credit market development benefited from improvements in the law on the books. The effectiveness of legal institutions (legality) has a much stronger impact on external finance than the law on the books. This is true especially for debt, but also for equity finance. This finding contrasts with studies in market economies showing that the quantitative effect of the law on the books is greater than legality at least for capital market development (La Porta et al. 1997; Levine 1998). Instead, it supports the proposition that legal transplants and extensive legal reforms are not sufficient for the evolution of effective legal and market institutions (Berkowitz, Pistor and Richard, 1999).

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Paper provided by European Bank for Reconstruction and Development, Office of the Chief Economist in its series Working Papers with number 48.

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Length: 40 pages
Date of creation: Feb 2000
Handle: RePEc:ebd:wpaper:48
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  1. Katharina Pistor, 2000. "Patterns of legal change: shareholder and creditor rights in transition economies," Working Papers 49, European Bank for Reconstruction and Development, Office of the Chief Economist.
  2. Carlin, Wendy & Mayer, Colin, 2003. "Finance, investment, and growth," Journal of Financial Economics, Elsevier, vol. 69(1), pages 191-226, July.
  3. Calvo, Guillermo A & Coricelli, Fabrizio, 1992. "Stagflationary Effects of Stabilization Programs in Reforming Socialist Countries: Enterprise-Side and Household-Side Factors," World Bank Economic Review, World Bank Group, vol. 6(1), pages 71-90, January.
  4. repec:hrv:faseco:30728041 is not listed on IDEAS
  5. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
  6. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
  7. repec:hrv:faseco:30728046 is not listed on IDEAS
  8. Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766.
  9. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
  10. Berkowitz, Daniel & Pistor, Katharina & Richard, Jean-Francois, 2003. "Economic development, legality, and the transplant effect," European Economic Review, Elsevier, vol. 47(1), pages 165-195, February.
  11. 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.
  12. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
  13. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  14. repec:hrv:faseco:30747162 is not listed on IDEAS
  15. Erik BERGLÖF & Ernst-Ludwig VON THADDEN, 1999. "The Changing Corporate Governance Paradigm : Implications for Transition and Developing Countries," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9912, Université de Lausanne, Faculté des HEC, DEEP.
  16. Levine, Ross, 1998. "The Legal Environment, Banks, and Long-Run Economic Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 596-613, August.
  17. D. Willer, 1997. "Corporate governance and shareholder rights in Russia," LSE Research Online Documents on Economics 20345, London School of Economics and Political Science, LSE Library.
  18. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
  19. D Willer, 1997. "Corporate Governance and Shareholder Rights in Russia," CEP Discussion Papers dp0343, Centre for Economic Performance, LSE.
  20. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
  21. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
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