The Economics of Corporate Governance and Mergers
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The Economics of Corporate Governance and Mergers

Edited by Klaus Gugler and B. Burcin Yurtoglu

This book provides an insightful view of major issues in the economics of corporate governance (CG) and mergers. It presents a systematic update on the developments in the two fields during the last decade, as well as highlighting the neglected topics in CG research, such as the role of boards, CG and public interest and the relation of CG to mergers. Two important conclusions can be drawn from this book: the first is that corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance; second, there is an important relationship between CG structures and the quality of firm decision-making, one of the most important being the decision to merge or take over another firm.
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Chapter 2: Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis

Sonja Fagernäs, Prabirjit Sarkar and Ajit Singh


* Sonja Fagernäs, Prabirjit Sarkar and Ajit Singh 1 INTRODUCTION Since La Porta et al. (LLSV) (1998) published a study on the effects of legal origin on shareholder protection (hereafter SP) and financial development, these topics have received considerable attention from economists. The authors found that countries with a common law origin have a higher level of SP than countries with a civil law origin, which in turn in a cross-section explains the different patterns of ownership concentration of companies in these countries. Ownership concentration is found to be lower in countries with a common law origin, explained by the better level of protection offered to minority shareholders. In a subsequent paper (Djankov et al., 2005), a similar line of reasoning is used to explain a positive correlation between the level of SP and stock market developments, such as those in market capitalization, numbers of initial public offerings and companies listed on the stock exchange. One of the underlying assumptions is that firm financing in the form of equity capital will be higher in countries with better protection. Several authors have since also worked on the links between financial development and legal origin (see for example Beck et al., 2003) or added a limited time dimension to the existing dataset and examined the determinants of SP (see, for example, Pagano and Volpin, 2006). Embedded in the literature on legal origin is the general perception that legal change is likely to be more frequent and the legal...

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