Prabirjit Sarkar

In studying the relationship between law, finance and development, the following issues immediately come to the fore: How does law affect economic development? How does one explain inter-country differences in legal rules, particularly in relation to corporate finance, corporate bankruptcy, minority shareholder rights. Are some countries’ legal rules better than other countries from the perspective of economic development? The starting point here is the pioneering and seminal work on the relationships between law, finance and development by La Porta, Lopez-de-Silanes, Sheifer and Vishny (LLSV) (see for example LLSV 1998). LLSV’s work, which has dominated leading journals in economics and finance during the last 10 years, represents an ambitious body of research that has tried to link together law, institutional economics and the general literature on the determinants of economic growth. LLSV pride themselves on the wide range of their empirical results and how these can only be explained in terms of a theory of legal origin that they propose. LLSV’s important claim is that these legal differences between countries can be categorized, quantified and analysed. Their efforts led to results showing that countries belonging to the “common-law family” (UK, etc.) have higher protection for shareholders and creditors than do countries belonging to the “civil law” legal family (France, etc.). Legal systems not only differ with respect to protection for shareholders, but also with respect to labour regulation, contract enforcement and court procedures, among other things. However, in this project, we shall mainly be concerned with the question of protection for shareholders and its implications for corporate finance and economic development. LLSV argue that, in this area, the common law works better than civil law and is more conducive to economic development, because: Judges interpret the law in common law countries where as in civil law countries judges are bound by explicit laws and codes leaving them with little discretion.This evolution of the difference between the two systems (common law and civil law system) has occurred over the last 300 years and has continued to affect development of laws to the present day. In other words, they assume a very strong path dependence.