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Law and Finance in Transition Economies

  • Katharina Pistor
  • Martin Raiser
  • Stanislaw Gelfer
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    This paper offers the first comprehensive analysis of legal change in the protection of shareholder and creditor rights in transition economies and its impact on the propensity of firms to raise external finance. Following La Porta et al. (1998), the paper constructs an expanded set of legal indices to capture a range of potential conflicts between different stakeholders of the firm. It supplements the analysis of the law on the books with an analysis of the effectiveness of legal institutions. Our main finding is that the effectiveness of legal institutions has a much stronger impact on external finance than does the law on the books, despite legal change that has substantially improved shareholder and creditor rights. This finding supports the proposition that legal transplants and extensive legal reforms are not sufficient for the evolution of effective legal and market institutions.

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    Paper provided by Center for International Development at Harvard University in its series CID Working Papers with number 49.

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    Date of creation: Jun 2000
    Date of revision:
    Handle: RePEc:wop:cidhav:49
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    Center for International Development at Harvard University (CID). 79 John F. Kennedy Street, Cambridge, MA 02138.

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    1. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
    2. Berkowitz, Daniel & Pistor, Katharina & Richard, Jean-Francois, 2003. "Economic development, legality, and the transplant effect," European Economic Review, Elsevier, vol. 47(1), pages 165-195, February.
    3. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
    4. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
    5. Carlin, Wendy & Mayer, Colin, 2003. "Finance, investment, and growth," Journal of Financial Economics, Elsevier, vol. 69(1), pages 191-226, July.
    6. 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.
    7. D. Willer, 1997. "Corporate governance and shareholder rights in Russia," LSE Research Online Documents on Economics 20345, London School of Economics and Political Science, LSE Library.
    8. 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 1131-50, July.
    9. D Willer, 1997. "Corporate Governance and Shareholder Rights in Russia," CEP Discussion Papers dp0343, Centre for Economic Performance, LSE.
    10. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
    11. Erik BERGLÖF & Ernst-Ludwig VON THADDEN, 1999. "The Changing Corporate Governance Paradigm : Implications for Transition and Developing Countries," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9912, Université de Lausanne, Faculté des HEC, DEEP.
    12. Calvo, Guillermo A & Coricelli, Fabrizio, 1992. "Stagflationary Effects of Stabilization Programs in Reforming Socialist Countries: Enterprise-Side and Household-Side Factors," World Bank Economic Review, World Bank Group, vol. 6(1), pages 71-90, January.
    13. Katharina Pistor, 2000. "Patterns of legal change: shareholder and creditor rights in transition economies," Working Papers 49, European Bank for Reconstruction and Development, Office of the Chief Economist.
    14. Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
    15. Ross Levine, 1998. "The legal environment, banks, and long-run economic growth," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 596-620.
    16. Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766, December.
    17. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
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