Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis

Abstract

This paper uses a new time series dataset of shareholder protection consisting of 60 annual legal indicators for the period 1970-2005 for France, Germany, the UK and the US. On the basis of these data it examines developments in shareholder protection and reassesses the claims that common-law countries have better shareholder protection than civil law countries. Furthermore it examines the relationship between legal changes and stock market development. It casts serious doubt on the claim that common-law countries have better shareholder protection which in turn leads to more stock market development.JEL Codes: F02, F36, E44, G11, O16, K22

Law, finance and development: further analyses of longitudinal data

“…Such time-series information has hitherto not been available. The first results from the analysis of the time-series data on shareholder protection for four OECD countries are reported in Fagernas, Sarkar and Singh (2008). 1 The present paper complements that article by further statistical and econometric analysis of the assembled data.…”

“…This question was empirically examined in Fagernas, Sarkar and Singh (2008) integration analysis and contrary to the received literature it indicated that there is no long-term relationship between shareholder protection and the development of the stock market. The conclusion was fine as far as it went but it was subject to some important reservations.…”

“…Following Fagernas, Sarkar and Singh (2008), the same point may be illustrated in a slightly different way as follows: If LLSV's Legal Origin theory was valid, one would expect to see the following rank order of shareholder protection in the four countries: UK (A), followed by or equal to the US (B, A), followed by Germany (C), followed by France (D), which may be summarised as the rank order ABCD or AACD. What in fact we observe in different sub-periods since 1970 are nowhere near the LLSV predictions.…”

“… The co-integration analysis used in Fagernas, Sarkar and Singh (2008) has been taken a step further by distinguishing between short-term changes arising from observed relationships between economic timeseries and their long-term relationships.…”

Legal Origin, Juridical Form and Industrialisation in Historical Perspective: The Case of the Employment Contract and the Joint-Stock Company

“…For example, a core tenet of the legal origin approach is that changes to shareholder protection law should be reflected in stock market development. Fagernäs et al (2007), using the shareholder protection index for the period 1970-2005, conduct a time series analysis to see if there is any relationship between the trend in legal change and stock market development over time in France, Germany, the UK and the US, using stock market turnover ratio as the dependent variable. No consistent relationship is found; and for the UK and France, the analysis suggests that there is (somewhat counter-intuitively) a negative relationship.…”