Law and Finace

NBER WORKING PAPER SERIES

LAW AND FINANCE

Rafael La Porta

Florencio Lopez-de-Silanes

Andrei Shleifer

Robert W. Vishny

NBER Working Paper 5661

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue

Cambridge, MA 02138

July 1996

We are grateful to Mark Chen, Steven Friedman, Magdalena bpez-Morton,

and Katya Zhuravskaya

for excellent research assistance, to Robert Barre, Edward Glaeser, Zvi Griliches, Oliver Hart,

Martin Hellwig, James Hines, Louis Kaplow, Raghu Rajan, Luigi Zingales, the participants of the

Harvard Law School and Catholic University of Milan Law and Economics Seminars, and especially

Professor Francesco DeNozza for comments, and to the NSF, the NBER and the HIID for financial

support of this research. This paper is part of NBER’s research program in Corporate Finance. Any

opinions expressed are those of the authors and not those of the National Bureau of Economic

Research.

O 1996 by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vishny. All

rights reserved. Short sections of text, not to exceed two paragraphs, maybe quoted without explicit

permission provided that full credit, including O notice, is given to the source.

NBER Working Paper 5661

July 1996

LAW AND FINANCE

ABSTRACT

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.

Rafael La Porta...