Working Paper: NBER ID: w7428
Authors: Rafael La Porta; Florencio Lopez-de-Silanes; Andrei Shleifer; Robert Vishny
Abstract: Recent research has documented large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of capital markets, in dividend policies, and in the access of firms to external finance. We suggest that there is a common element to the explanations of these differences, namely how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems.
Keywords: Investor Protection; Corporate Governance; Legal Systems
JEL Codes: G21; G28; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stronger legal protections for outside investors (G38) | Better financing conditions for firms (G32) |
| Effective legal systems (K40) | More capital raised by firms (G32) |
| Legal framework mitigates expropriation practices (H13) | Reduces extent of investor loss (G33) |
| Legal protections shape behavior of insiders (P37) | Makes expropriation less efficient (H13) |