l&e law and finance 2012

8/3/2019 L&E Law and Finance 2012

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School of Economics, Finance and Management

MSc Law and Economics (ECONM2027)

Brief Notes on Law and Finance

1. Quick background on Legal Families

The two big legal families are:

Civil Law Common Law

Primary features of civil law are:

Origin based on Roman Law and CodeNapoleon

Historically concerned with preventingdisorderextensive regulation to control it byensuring judges follow the states objectives

Developed in continental Europe Based on general abstract principles regardless

of case

Codified with detailed definitions


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Each rule sets out lengthy enumerations ofspecific applications or exceptions

There are three sub families of civil law(French, German and Scandinavian)

Primary features of common law are:

Origin based on traditional English Law Developed to control the power of the state(as represented initially by monarchy) Evolved in current form from 11th century

onwards

Doctrine of stare decisis (translation - stickto decisions, i.e., essentially precedent

based) Based on reasoning from case to case Process of distinguishing (judges do not

have to apply precedent if alleged precedent

is significantly different from current case)

Judge based law

English Common Law and French and German

Civil Law have been exported throughout the

world.

See Annex 1


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2. Is the distinction between the legal families

significant and permanent?

Balas, La Porta, Lopez-de-Silanes and Shleifer

(2008 paper: The divergence of legal procedures)

suggest that it is.

See Annex 2, 3 and 4

(taken from their paper).

They look at two examples:

Bounced cheque Eviction of tenant.

Uses seven measures to create an index of

formalism they show that civil law has more

formalism than common law.

Their evidence (from 1950 onwards) shows no

convergence if anything there appears to bedivergence.


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3. Legal origin theory

Annex 5 gives La Porta, Lopez-de-Silanes, and

Shleifers view of the relationship between legalorigin and outcomes.

Common law appears to give greater protection to

outside investors and creditors relative to civil

common law.

If true, what might be reasons?

One strand goes back to strength of thestate versus individual

Another suggests that common law isbetter able to change to meet new

situations

So what follows if it is true?

Better protection leads to better developedfinancial markets. See Annex 6, 7 8 and 9.

Less well documented but growing view thatdeveloped financial markets are good for

growth. See Annex 10.


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Ownership concentration is response to thesedifferences in investor protection (the

concentration of ownership is highest in civil

law countries).

4. All the above is hotly disputed.

Specific criticisms include:

Poor data Reverse causality Omitted variables Not what is written but the implementation of

it

See Annex 11


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5. Two Alternative views

5a Endowments Theory

There are arguments that it is the fundamental

initial endowments that matter, e.g., Beck,

Demirguc-Kunt, and Levine (2003) argue (using

settler mortality and latitude as a proxy for initial

endowments) that it is initial endowments that

matter.

See Annex 12, 13, 14, 15 and 16.

5b. Trust

Franks et al (2008) disagree with underlying thesis

about legal origin and claim that there is little

evidence once one looks in detail.

They claim dispersion came first (formalinvestor protection only emerged in the secondhalf of the century), claiming 1948 was the

key date and that there was little protection in

UK at all until end of 1920s - yet there was

significant dispersion of ownership at this time

and one could argue that the biggest changes

came before 1950.


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See Annex 17

They also claim protection came throughstatute not through common law.

They claim the key issue is trust (arguing thatlocal stock exchanges and shareholders

distance from the company matter in creating

trust).

See Annex 18 and 19


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References:

(In each case you will probably need to press ctrl when you click)

1. The Economic Consequences of Legal Origins Rafael La Porta,

Florencio Lopez-de-Silanes, and Andrei Shleifer Journal of Economic

Literature 2008, 46:2, 285332

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028081

Contains Annex 1, 5, 6, 7, 8, 9, 10.

2. Law, endowments, and finance Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine. Journal of Financial Economics Volume 70,

Issue 2, November 2003, Pages 137-181


(click on NBER subscribers download)

Contains Annex 11, 12, 13, 14, 15 and 16.

3. Ownership: Evolution and Regulation, Julian Franks, Colin Mayer,and Stefano Rossi, inReview of Financial Studies (2008).


Contains Annex 17, 18 and 19.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028081http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028081http://www.sciencedirect.com/science/journal/0304405Xhttp://www.sciencedirect.com/science?_ob=PublicationURL&_tockey=%23TOC%235938%232003%23999299997%23466522%23FLA%23&_cdi=5938&_pubType=J&view=c&_auth=y&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=10a8515c9b360c1d2840c8e9ef0df4cahttp://www.sciencedirect.com/science?_ob=PublicationURL&_tockey=%23TOC%235938%232003%23999299997%23466522%23FLA%23&_cdi=5938&_pubType=J&view=c&_auth=y&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=10a8515c9b360c1d2840c8e9ef0df4cahttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=321355http://papers.ssrn.com/sol3/papers.cfm?abstract_id=321355http://papers.ssrn.com/sol3/papers.cfm?abstract_id=354381http://papers.ssrn.com/sol3/papers.cfm?abstract_id=354381http://papers.ssrn.com/sol3/papers.cfm?abstract_id=354381http://papers.ssrn.com/sol3/papers.cfm?abstract_id=321355http://www.sciencedirect.com/science?_ob=PublicationURL&_tockey=%23TOC%235938%232003%23999299997%23466522%23FLA%23&_cdi=5938&_pubType=J&view=c&_auth=y&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=10a8515c9b360c1d2840c8e9ef0df4cahttp://www.sciencedirect.com/science?_ob=PublicationURL&_tockey=%23TOC%235938%232003%23999299997%23466522%23FLA%23&_cdi=5938&_pubType=J&view=c&_auth=y&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=10a8515c9b360c1d2840c8e9ef0df4cahttp://www.sciencedirect.com/science/journal/0304405Xhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028081

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