Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis

Abstract

Using a panel data set covering a range of developed and developing countries, we show that common-law systems were more protective of shareholder interests than civil-law ones in the period 1995-2005. However, civilian systems were catching up, suggesting that legal origin was not much of an obstacle to formal convergence in shareholder protection law. We find no evidence of a positive impact of these legal changes on stock market development. Possible explanations are that laws have been overly protective of shareholders and that transplanted laws have not worked well in contexts for which they were not suited.

Corporate governance and national institutions: A review and emerging research agenda

“…This research shows how different legal traditions (e.g., common versus civil law) are linked to the levels of investor protection, which, in turn, shape agency relationships by influencing the power of shareholders vis-à-vis the board, as well as the relative influence of minority versus large shareholders. However, understanding legal institutions in terms of the dichotomous categories of common law versus civil law systems has been widely critiqued as too simplistic on both theoretical and empirical grounds (Coffee, 2001;Armour, Deakin, Sarkar, Siems & Singh, 2009). …”

Culture and Corporate Governance: The Influence of Language and Religion in Switzerland

“…In consequence, it is believed that introducing elements of Anglo-American corporate governance practices would potentially improve economic development. However, such corporate governance reforms have not per se led to greater stock market development (Armour et al 2009). We can still observe a variety of corporate control structures around the globe.…”

The Regulatory Effect on the Performance of Financial Analysts: Time Series from Two Different Legal Systems

“…cbr.cam.ac.uk. Armour et al [22] include not only positive law, but also rules stemming from self-regulation, such as corporate governance and takeover codes, where they are binding for (listed) companies. The SPI also differs from the LLSV in that it is not based on binary variables, but allows for intermediary scores between 0 and 1 where appropriate.…”

“…The SPI also explicitly acknowledges the importance of coding for functionally equivalent instruments in different countries. Finally, it is constructed as a longitudinal measure for quantifying the legal SPI of a given country for each year [22,48,49].…”

“…Both Legal Enforcement and the LLSV are based on cross-sectional data, which makes them relevant for classifying countries. Previous studies using these indexes, however, are lacking in one important aspect because they do not take into consideration the fact that shareholder protection regulations change over time in most countries [16][17][18][19][20][21].The validity of the legal origin theory has also been questioned lately by several scholars and the idea that historical roots will exert powerful impact on today's market is far from obvious [22][23][24][25][26] In this study we: 1) overcome the earlier shortcoming using a static index by using times series analyses of shareholder protection to investigate the relationship between the level of shareholder protection and analysts' performance, and 2) challenge the legal origin hypothesis by looking at two countries (the UK and Sweden) with a similar pattern of shareholder protection regulation development but different legal origins as expressed in the legal origin theory. Our main conclusion is that strengthened shareholder protection improves analysts' ability to reduce information asymmetry, a deduction based on significant results showing that strengthened shareholder protection improves forecast accuracy in both countries.…”