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Law and Finance: Common-law and Civil-law Countries Compared

The "law and finance theory" is an ambitious and fascinating attempt to combine insights from the theory of corporate finance, institutional economics, legal and economic history as well as the recent studies on the determinants of economic growth into an encompassing theory, thereby filling important gaps of our understanding of the ultimate causes and linkages underlying modern economic development. It argues that the legal system, which today's countries inherited from the past, is crucial in the way it is favouring – or hampering – financial development. The major conclusion of this literature is that the common law system generally provided the more favourable basis for financial development and economic growth, and on the other hand, the French branch of the civil law tradition is the least favourable in this respect. This paper identifies a number of problems that cast serious doubt on the soundness of the empirical basis generally referred to in this literature. However, our analyses support the idea that the legal tradition has pronounced effects with respect to shareholder protection. In particular, while a critical look at the indicators revealed that there is not much evidence that common law countries protect financial investors better than civil law countries, we find support for the view that investors are treated differently.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 05-99.

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Length: 27 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:kof:wpskof:05-99
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  1. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," NBER Working Papers 5879, National Bureau of Economic Research, Inc.
  2. Singh, Ajit & Singh, Alaka & Weisse, Bruce, 2002. "Corporate governance, competition, the new international financial architecture and large corporations in emerging markets," MPRA Paper 53665, University Library of Munich, Germany.
  3. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  4. Thorsten Beck & Ross Levine, 2003. "Legal institutions and financial development," Policy Research Working Paper Series 3136, The World Bank.
  5. repec:ner:tilbur:urn:nbn:nl:ui:12-3106564 is not listed on IDEAS
  6. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  7. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," NBER Working Papers 8460, National Bureau of Economic Research, Inc.
  8. Perotti, Enrico C & von Thadden, Ernst-Ludwig, 2003. "The Political Economy of Bank and Equity Dominance," CEPR Discussion Papers 3914, C.E.P.R. Discussion Papers.
  9. Enrico Perotti & Ernst-Ludwig von Thadden, 2002. "The Political Economy of Bank- and Market Dominance," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.14, Université de Lausanne, Faculté des HEC, DEEP, revised Apr 2003.
  10. Da Rin, Marco, 1997. "Finance and technology in early industrial economies: the role of economic integration," Research in Economics, Elsevier, vol. 51(3), pages 171-200, September.
  11. Marco Becht, 1999. "European corporate governance: trading off liquidity against control," ULB Institutional Repository 2013/13314, ULB -- Universite Libre de Bruxelles.
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