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Investor Protection and the Coasian View

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  • Bergman, Nittai
  • Nicolaievsky, Daniel

Abstract

Some legal regimes leave gaps in the protection provided by the law to firm investors. This paper considers the decision by a firm to opt out of the law and bridge those gaps using contracts. Examining the charters of a sample of Mexican firms, we find that private firms often enhance significantly the protection offered by the law to their investors, but public firms rarely do so. Motivated by these findings, we construct a model that endogenizes the degree of investor protection that firms provide, using as springboard the assumption that legal regimes differ in their ability to enforce what we call precisely filtering contracts, namely, contracts that provide protection only in those cases where expropriation can occur. Our model generates predictions about the types of contracts that would be employed and the levels of investor protection that they would provide across different legal regimes in both private and in public firms.

Suggested Citation

  • Bergman, Nittai & Nicolaievsky, Daniel, 2004. "Investor Protection and the Coasian View," Working papers 4476-04, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    • Handle: RePEc:mit:sloanp:7397
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    File URL: http://hdl.handle.net/1721.1/7397
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    Cited by:

    1. Bottazzi, Laura & Da Rin, Marco & Hellmann, Thomas, 2009. "What is the role of legal systems in financial intermediation? Theory and evidence," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 559-598, October.
    2. Pablo Casas-Arce & Albert Saiz, 2006. "Owning versus leasing: do courts matter?," Working Papers 06-21, Federal Reserve Bank of Philadelphia.
    3. Pablo Casas-Arce & Albert Saiz, 2010. "Owning versus Renting: Do Courts Matter?," Journal of Law and Economics, University of Chicago Press, vol. 53(1), pages 137-165, February.

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    Keywords

    Corporate governance; investor protection; expropriation; contract design;
    All these keywords.

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