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Shareholder Protection, Stock Market Development, and Politics

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Abstract

This paper presents a political economy model where there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model’s predictions are tested on panel data for 47 countries over 1993-2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border M&A activity, consistent with the model.

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File URL: http://www.csef.it/WP/wp149.pdf
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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 149.

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Date of creation: 01 Nov 2005
Publication status: Published in the Journal of the European Economic Association, 2006, vol. 4, pages 315-41
Handle: RePEc:sef:csefwp:149
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Keywords: political economy; shareholder protection; corporate governance; stock market;

Other versions of this item:

Find related papers by JEL classification:
  • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
  • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
  • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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  1. Naomi R. Lamoreaux & Jean-Laurent Rosenthal, 2004. "Legal Regime and Business's Organizational Choice: A Comparison of France and the United States," NBER Working Papers 10288, National Bureau of Economic Research, Inc.
  2. Matías Braun & Claudio Raddatz, 2004. "Trade liberalization and the politics of financial development," Working Papers 04-3, Federal Reserve Bank of Boston.
  3. Raghuram G. Rajan & Luigi Zingales, 2000. "The Great Reversals: The Politics of Financial Development in the 20th Century," OECD Economics Department Working Papers 265, OECD Publishing.
  4. 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.
  5. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why are foreign firms listed in the U.S. worth more?," Journal of Financial Economics, Elsevier, vol. 71(2), pages 205-238, February.
  6. Stulz, Rene M. & Williamson, Rohan, 2003. "Culture, openness, and finance," Journal of Financial Economics, Elsevier, vol. 70(3), pages 313-349, December.
  7. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
  8. Arturo Bris & Christos Cabolis, 2008. "The Value of Investor Protection: Firm Evidence from Cross-Border Mergers," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 605-648, April.
  9. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law, endowments, and finance," Journal of Financial Economics, Elsevier, vol. 70(2), pages 137-181, November.
  10. 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.
  11. Cespa, Giovanni & Cestone, Giacinta, 2004. "Corporate Social Responsibility and Managerial Entrenchment," CEPR Discussion Papers 4648, C.E.P.R. Discussion Papers.
  12. Marco Pagano & Paolo F. Volpin, 2005. "The Political Economy of Corporate Governance," American Economic Review, American Economic Association, vol. 95(4), pages 1005-1030, September.
  13. repec:rus:hseeco:72153 is not listed on IDEAS
  14. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank.
  15. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  16. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 502-519.
  17. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March.
  18. Miller, Darius P., 1999. "The market reaction to international cross-listings:: evidence from Depositary Receipts," Journal of Financial Economics, Elsevier, vol. 51(1), pages 103-123, January.
  19. Acemoglu, Daron, 2003. "Why not a political Coase theorem? Social conflict, commitment, and politics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 620-652, December.
  20. repec:hrv:faseco:30728041 is not listed on IDEAS
  21. M. Pagano & P. F. Volpin, 2005. "Managers, Workers, and Corporate Control," Journal of Finance, American Finance Association, vol. 60(2), pages 841-868, 04.
  22. Franklin Allen, 2005. "Corporate Governance in Emerging Economies," Oxford Review of Economic Policy, Oxford University Press, vol. 21(2), pages 164-177, Summer.
  23. Rossi, Stefano & Volpin, Paolo F., 2004. "Cross-country determinants of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 74(2), pages 277-304, November.
  24. Braun, Matias, 2004. "Trade Liberalization and the Politics of Financial Development," Santa Cruz Department of Economics, Working Paper Series qt70v7f9ff, Department of Economics, UC Santa Cruz.
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Cited by:

  1. Sonja Fagernäs & Prabirjit Sarkar & Ajit Singh, 2008. "Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis," Chapters,in: The Economics of Corporate Governance and Mergers, chapter 2 Edward Elgar Publishing.
  2. 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.
  3. Dewenter, Kathryn L. & Kim, Chang-Soo & Novaes, Walter, 2010. "Anatomy of a regulatory race to the top: Changes in delisting rules at Korea's two stock exchanges, 1999-2002," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 456-468, September.
  4. Li, Kai, 2007. "The growth in equity market size and trading activity: An international study," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 59-90, January.
  5. Camilleri, Silvio John & Falzon, Joseph, 2013. "The Challenges of Productivity Growth in the Small Island States of Europe: A Critical Look of Malta and Cyprus," MPRA Paper 62489, University Library of Munich, Germany.
  6. Camilleri, Silvio John, 2006. "Strategic Priorities for Stock Exchanges in New EU Member States," MPRA Paper 62494, University Library of Munich, Germany.

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