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Common Law vs. Civil Law: Which System Provides More Protection to Shareholders and Creditors and Promotes Financial Development


  • sarkar, prabirjit


This study re-examines the theory of legal-origin on the basis of a new longitudinal dataset for four OECD countries (UK, USA, France and Germany) over a long time span 1970-2005. It observes that the civil law countries (France and Germany) provided better minority shareholder protection and creditor protection relating to debtors’ control while the common law countries (UK and USA) provided better creditor protection relating to credit contract and insolvency. Through dynamic panel data modelling our study shows that minority shareholder protection has a long-term favourable effect only on stock market listing of firms and debtors’ control has a similar effect on credit market expansion while the credit contract component of creditor protection has the opposite effect. Thus, our study questions the proposition that common-law countries provide more protection to their shareholders and creditors; it also casts doubt on the related proposition that shareholder and creditor protection promotes financial development.

Suggested Citation

  • sarkar, prabirjit, 2011. "Common Law vs. Civil Law: Which System Provides More Protection to Shareholders and Creditors and Promotes Financial Development," MPRA Paper 32930, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:32930

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    References listed on IDEAS

    1. Simon Deakin & Ajit Singh, 2009. "The Stock Market, the Market for Corporate Control and the Theory of the Firm: Legal and Economic Perspectives and Implications for Public Policy," Chapters,in: The Modern Firm, Corporate Governance and Investment, chapter 9 Edward Elgar Publishing.
    2. Prabirjit Sarkar & Ajit Singh, 2010. "Law, finance and development: further analyses of longitudinal data," Cambridge Journal of Economics, Oxford University Press, vol. 34(2), pages 325-346, March.
    3. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    4. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    5. John Armour & Simon Deakin & Prabirjit Sarkar & Mathias Siems & Ajit Singh, 2007. "Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis," Working Papers wp358, Centre for Business Research, University of Cambridge.
    6. S. Mahendra Dev, 2008. "India," Chapters,in: Handbook on the South Asian Economies, chapter 1 Edward Elgar Publishing.
    7. 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.
    8. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    9. Sarkar, Prabirjit, 2007. "Stock Market Development and Capital Accumulation: Does Law Matter? A Case Study of India," MPRA Paper 5052, University Library of Munich, Germany.
    10. John Armour & Simon Deakin & Priya Lele & Mathias Siems, 2009. "How Do Legal Rules Evolve? Evidence from a cross-country Comparison of Shareholder, Creditor and Worker Protection," Working Papers wp382, Centre for Business Research, University of Cambridge.
    11. Hall, Peter A. & Soskice, David (ed.), 2001. "Varieties of Capitalism: The Institutional Foundations of Comparative Advantage," OUP Catalogue, Oxford University Press, number 9780199247752.
    12. Edward F. Blackburne III & Mark W. Frank, 2007. "Estimation of nonstationary heterogeneous panels," Stata Journal, StataCorp LP, vol. 7(2), pages 197-208, June.
    13. Levine, Ross, 2001. "International Financial Liberalization and Economic Growth," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 688-702, November.
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    More about this item


    Shareholder protection; Creditor Protection; Investor Protection; Corporate Governance; Law and Finance;

    JEL classification:

    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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