Legal Origins and Modern Stock Markets

This post is by Mark Roe, Harvard Law School.

The Program on Corporate Governance recently issued my discussion paper, Legal Origins and Modern Stock Markets. The paper will be published in the Harvard Law Review in December 2006. The Abstract is as follows:

Legal origin–civil vs. common law–is said in much modern economic work to determine the strength of financial markets and the structure of corporate ownership, even in the world’s richer nations. The main means are thought to lie in how investor protection and property protection connect to civil and common law legal origin. But, I show here, although stockholder protection, property rights, and their supporting legal institutions are quite important, legal origin is not their foundation.

Modern politics is an alternative explanation for divergent ownership structures and the differing depths of securities markets in the world’s richer nations. Some legislatures respect property and stock markets, instructing their regulators to promote financial markets; some do not. Brute facts of the twentieth century–the total devastation of many key nations, wrecking many of their prior institutions–predict modern postwar financial markets’ strength well and tie closely to postwar divergences in politics and policies in the world’s richest nations. Nearly every core civil law nation suffered military invasion and occupation in the twentieth century–the kinds of systemic shocks that destroy even strong institutions–while no core common law nation collapsed under that kind of catastrophe. The interests and ideologies that thereafter dominated the world’s richest nations and those nations’ basic economic tasks (such as postwar reconstruction for many) varied over the last half century, and these differences in politics and tasks made one collection of the world’s richer nations amenable to stock markets and another indifferent or antagonistic. These political economy ideas are better positioned than legal origin concepts to explain the differing importance of financial markets in the wealthy West.

The full discussion paper is available for download here.

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