Edited by Klaus Gugler and B. Burcin Yurtoglu
Chapter 2: Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis
* 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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