Shareholder Protection And Stock Market Development

With the help of recent developments in quantitative comparative law literature this paper tries to determine the long run equilibrium relationship between shareholder protection and stock market development and ultimately their relationship with economic growth in the context of India. Within a multivariate VAR framework, Granger Causality/ Block Exogeneity Wald Tests are employed to investigate the long run causal relationship in a system consisting of stock market, legal development and economics growth. On the contrary to most of the existing literature our results only vaguely support the hypothesis that shareholder protection causes stock market development and eventually economic growth as the relationship is not consistent across alternative specifications of stock market and legal development.

We test the 'law matters' and 'legal origin' claims using a newly created panel dataset measuring legal change over time in a sample of developed and developing countries. Our dataset improves on previous ones by avoiding country-specific variables in favour of functional and generic descriptors, by taking into account a wider range of legal data, and by considering the effects of weighting variables in different ways, thereby ensuring greater consistency of coding. Our analysis shows that legal origin explains part of the pattern of change in the adoption of shareholder protection measures over the period from the mid-1990s to the present day: in both developed and developing countries, common law systems were more protective of shareholder interests than civil law ones. We explain this result on the basis of the head start common law systems had in adjusting to an emerging 'global' standard based mainly on Anglo-American practice. Our analysis also shows, however, that civil law origin was not much of an obstacle to convergence around this model, since civilian systems were catching up with their counterparts in the common law. We then investigate whether there was a link in this period between increased shareholder protection and stock market development, using a number of measures such as stock market capitalisation, the value of stock-trading and the number of listed firms, after controlling for legal origin, the state of economic development of particular countries, and their position on the World Bank rule of law index. We find no evidence of a long-run impact of legal change on stock market development. This finding is incompatible with the claim that legal origin affects the efficiency of legal rules and ultimately economic development. Possible explanations for our result are that laws have been overly protective of shareholders; transplanted laws have not worked as expected; and, more generally, the exogenous legal origin effect is not as strong as widely supposed.

On the one hand, it can be argued that the increasing economic and political interdependence of countries has led to the convergence of national legal systems. On the other hand, advocates of the counterhypothesis maintain that this development is both unrealistic and unnecessary. Mathias M. Siems examines the company law of the UK, the USA, Germany, France, Japan and China to see how this issue affects shareholder law. The author subsequently analyses economic and political factors which may or may not lead to convergence, and assesses the extent of this development. Convergence of Shareholder Law not only provides a thorough comparative legal analysis but also shows how company law interconnects with political forces and economic development and helps in evaluating whether harmonisation and shareholder protection should be enhanced.

'Investor Protection and Corporate Governance' analyzes the impact of corporate governance on firm performance and valuation. Using unique datasets gathered at the firm-level the first such data in the region and results from a homogeneous corporate governance questionnaire, the book examines corporate governance characteristics, ownership structures, dividend policies, and performance measures. The book's analysis reveals the very high levels of ownership and voting rights concentrations and monolithic governance structures in the largest samples of Latin American companies up to now, and new data emphasize the importance of specific characteristics of the investor protection regimes in several Latin American countries. By and large, those firms with better governance measures across several dimensions are granted higher valuations and thus lower cost of capital. This title will be useful to researchers, policy makers, government officials, and other professionals involved in corporate governance, economic policy, and business finance, law, and management.

This paper investigates empirically the political determinants of stock market development. We argue that those determinants are grounded in distributional cleavages among voters and interest groups. Our argument reverses the sign of the prevailing explanation about the role of partisanship in the literature, where it is usually assumed that left governments frighten investors. To the extent that financial development is translated into higher levels of investment that increases labor demand, workers and the parties representing them will adopt policies and regulations that favor the capitalization of financial markets. We explore the empirical content of our hypothesis against several competing explanations: the legal origins school, which argues common law proxies stronger investor protections than civil law; the electoral law school, which argues proportional representation provides weaker protections than do majoritarian ones; the institutional economics view, which argues that checks on policymaking discretion such as veto gates protect the property rights of investors and encourage investment. We test the implications of the different arguments on the level of stock market capitalization in a panel of 83 countries over the period 1975-2004. We find preliminary evidence in favor of the partisanship hypothesis: contrary to received wisdom, our results suggest that left-leaning governments are more likely to be associated with higher stock market capitalization than their counterparts to the right and center of the political spectrum. The association between the left and market capitalization is stronger in the 1990s. These results are consistent with recent theories emphasizing an emerging coalition of workers and owners against managers in favor of greater transparency and shareholder protection.