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Law and Finance: An Introduction

One of my research interests is the relationship between law and finance. This area has been a huge growth area in economics since Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny published their path-breaking 'Law and Finance' in 1998. In this paper, they examined the legal protections afforded to shareholders and creditors in 49 economies. Their results were startling: investor protection was best in common-law countries (i.e., the UK and her former colonies) and worst in French-civil-law countries (i.e., France and her former colonies). German-civil-law and Scandinavian-civil-law countries were somewhere in between. Legal origin (i.e., how a country's legal system was developed centuries ago whether within a country or transplanted via colonisation) seems to matter for present-day legal protection of investors. In other words, the legacy of the past very much matters for the present. 

Subsequent work on this topic found that legal origin affects financial development, corporate dividend policy, and the structure of corporate ownership. In addition, economists have found that legal origin seems to affect more than finance since it predicts labour-market regulation, military conscription, the severity of currency crises, government ownership banks, and government control of the media.

As this law and finance research agenda has substantial normative implications, it has had a major effect on pro-market investor protection law reform around the world. The World Bank's Doing Business reports have played a major role in implementing the type of reform implied by the work of these economists. 

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