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

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Abstract

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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  • Michael Graff, 2005. "Law and Finance: Common-law and Civil-law Countries Compared," KOF Working papers 05-99, KOF Swiss Economic Institute, ETH Zurich.
  • Handle: RePEc:kof:wpskof:05-99
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    File URL: http://dx.doi.org/10.3929/ethz-a-004957428
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    5. 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.
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    7. Thorsten Beck & Ross Levine, 2003. "Legal institutions and financial development," Policy Research Working Paper Series 3136, The World Bank.
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    Cited by:

    1. Olga Pogrebennyk, 2014. "Code or court: the financial-political aspect of correlation between common and civil law," European Journal of Law and Economics, Springer, vol. 37(2), pages 175-181, April.
    2. Jérôme Sgard, 2006. "Do legal origins matter? The case of bankruptcy laws in Europe 1808–1914," Sciences Po publications info:hdl:2441/6824, Sciences Po.
    3. Jérôme Sgard, 2006. "Do legal origins matter? The case of bankruptcy laws in Europe 1808-1914," Post-Print hal-01021354, HAL.
    4. Michael Graff, 2013. "Legal origin and financial development: new evidence for old claims? The creditor rights index revisited," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, vol. 6(4), pages 326-344.
    5. Michael Graff, 2006. "Myths and Truths: The "Law and Finance Theory" Revisited," KOF Working papers 06-122, KOF Swiss Economic Institute, ETH Zurich.

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