Simon Deakin

Prabirjit Sarkar

Mathias Siems


University of Cambridge, ECGI

University of Cambridge

Durham University, University of Cambridge

Is There a Relationship Between Shareholder Protection and Stock Market Development ?


The paper uses recently created datasets measuring legal change over time in a sample of 28 developed and emerging economies to test whether the strengthening of share-holder rights in the course of the mid-1990s and 2000s promoted stock market devel-opment in those countries. It finds only weak and equivocal evidence of a positive effect of shareholder protection on market capitalisation, the value of stock trading, and the turnover ratio, and a negative impact on the number of listed companies. There is stronger evidence of reverse causality, in the sense of stock market development at country level generating changes in shareholder protection law. We conclude, firstly, that legal reforms were at least in part an endogenous response to stock market devel-opment and not simply a reaction to the generation of global standards; but, secondly, that the laws passed in response to the demand for shareholder empowerment did not consistently have the expected impact on financial markets, and may have had some negative and perverse results.


At the core of the new institutional economics pioneered by Douglass North is the claim that the quality of legal and other institutions makes a difference to economic development and growth (North, 1990; North et al., 2009). In their cross-sectional studies of the relation between law and finance, Andrei Shleifer and his collaborators found evidence to support this claim, by demonstrating that a higher level of shareholder and creditor protection was correlated with increased financial development (La Porta et al.1998, 2008; Djankov et al., 2008). This position has been extremely influential among researchers and policy-makers since the mid-1990s, thanks in part to its conjunction with a parallel literature claiming to show that financial development promotes economic growth (King and Levine, 1993; Levine, 1997; Beck et al 2000, 2003; Claessens and Laeven, 2003). During this time, strengthening shareholder and creditor rights as a precondition for financial market development became a mainstay of global policy initiatives, including the World Bank’s Doing Business initiative, which dates from 2003 (World Bank, 2003), and the OECD’s Principles of Corporate Governance, first published in 1999 and updated in 1999 and 2015 (OECD, 2015), as well as many national law reform programmes.

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