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Law and Financial Development

By Harvard Law School Program on Corporate Governance

In the paper, Law and Financial Development: What We Are Learning from Time-Series Evidence, which was recently made publicly available on SSRN, my co-authors (Simon Deakin at the University of Cambridge; Viviana Mollica at Queen Mary University of London; and Mathias Siems at the University of East Anglia) and I explore the empirical evidence regarding the legal origins hypothesis. It is widely believed that legal institutions matter for financial development. According to the ?legal origins? hypothesis developed by La Porta et al. and their collaborators, legal systems vary considerably in the way they regulate economic activity. A principal cause of this diversity is the role played by the different legal traditions or ?origins? of the common and civil law (La Porta et al., 2008). It is argued that countries whose legal systems have a common law origin emphasize freedom of contract and the protection of private property, whereas those with civil law roots favor an activist role for the state. These legal differences seem to have tangible economic effects. Common law systems have been found to have more dispersed share ownership (La Porta et al., 1999), more liquid and extensive capital markets (La Porta et al., 1998), and more highly developed systems of private credit, than civilian ones. In part through the Doing Business reports of the World Bank, these findings have come to influence policy reform in ?dozens of countries? over the past decade (La Porta et al., 2008:326). Reforms to corporate and bankruptcy law have seen a strengthening of shareholder and creditor rights, particularly the former.

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Full post as published by The Harvard Law School Corporate Governance Blog on June 18, 2010 (boomark / email).