Rafael La Porta

Florencio Lopez-de-Silanes

Andrei Shleifer

Robert W. Vishny

Department of Economics - Harvard University

Department of Economics - Harvard University

Kennedy School of Government - Harvard University

Graduate School of Business - University of Chicago

Law and Finance


This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle.

We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.


In traditional finance of Modigliani and Miller (1958), securities are recognized by their cash flows. For example, debt has a fixed promised stream of interest payments, whereas equity entitles its owner to receiving dividends. Recent financial research has shown that this is fm from the whole story, and that the defining feature of various securities is the rights that they bring to .,

 their owners (see, e.g., Hart 1995). Thus shares typically give their owners the right to vote for directors of companies, whereas debt entitles creditors to, for example, the power to repossess collateral when the company fails to make promised payments.


The rights attached to securities become tremendously important once it is recognized that managers of companies act in their own interest. Investors’ rights give them the power to extract from these managers the returns on their investment. Thus shareholders receive dividends because they can vote out the directors who do not pay them, and creditors are paid because they have the power to repossess collateral. Without these rights, investors would not be able to get paid, and therefore firms would not have the benefit of raising finds from these investors, The rights attached to securities are what managers and entrepreneurs give up to get finance. 

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