Corporate Governance, Enforcement and Financial Development

Corporate Governance, Enforcement and Financial Development

The Chinese Experience

Ding Chen

This important new book attempts to establish a fresh conceptual framework for the study of corporate governance by employing the new institutional economics of contract enforcement. This framework helps to clarify two critical issues including the role of law in financial development and whether there is an optimal corporate governance model that should be followed by countries attempting to develop their own stock markets.

Chapter 5: Conclusion

Ding Chen

Subjects: asian studies, asian development, asian law, development studies, asian development, economics and finance, corporate governance, financial economics and regulation, institutional economics, law - academic, asian law, corporate law and governance


Chapter 5 concludes this book by reiterating its central arguments and major contribution. It also suggests the broad implications of China’s experience for developing and transition economies in their pursuit of financial development. Finally, it briefly discusses the future of China’s stock market. This book concentrates on the enforcement problem that is believed to be central to corporate governance and financial development, at least in transition and developing countries where there is often a big gap between ‘law on the books’ and ‘law in practice’. In this book, corporate governance is regarded as a problem of how to enforce the financial contracts between external financiers and corporate controllers. Relying on the NIE insights, it first establishes a general conceptual framework for contract enforcement and then applies it to a corporate context. In the stock market, the role of formal enforcement seems to be particularly important because the financial contracts are often too complex for small investors to understand and the gains from cheating often too large to be constrained by the consideration of future costs. In the absence of effective formal enforcement, various informal enforcement mechanisms, such as concentrated ownership, self-regulation, or relation of trust, might arise to respond to the weakness and could facilitate growth of the capital market to some extent. But they are only a partial substitute for formal enforcement, which would incur substantial costs in the long run. For sustainable development, a capital market must build on effective formal enforcement. Nonetheless, the importance of formal enforcement should not be overstated.

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