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Unformatted text preview: Shleifer Lecture • At this point, no longer considering benefits of communism vs. capitalism • Agreement about what constitutes good economic institution o Secure liberty o Secure private property Encourages investment Organized- not free for all grabbing property o But how do they go about securing private property??? • How do you get financial markets- why are there differences in development • Slide- measures of financial markets- value and number of firms o Big differences even among developed courtries • Argument o Fundamental problem of corporate governance Problem with expropriation of outside investors by insiders • Forms: transfer pricing, transfer of asset (tunnel money out of public company and into privately controlled company), targeted issues and repurchases of securities (basically buying own stock at zero price and increase share of company owned) o Executive compensation and consumption of perks- way as taking money away from outside investors Principle problem of corporate governance is problem of expropriation •-- investors/banks will be unwilling to lend o Leads to adverse effects o Intimate connection btw. restrictions on expropriation and financial growth (money lending/investing) • How do countries restrict expropriation o Law plays a crucial role in investor expropriation o Also need enforcement of the law o Investors obtain rights or powers in exchange for investing—need way to enforce these legal rights Need to have fair institution of justice – fair legal rules and fair enforcement mechanisms o Types of laws: company, bankruptcy, securities, takeover, courts and regulators Combine to protect shareholders and creditors; force timely disclosure of accurate information Stronger investor protection leads to deeper financial markets and better financing terms for firms o **is this true in the data • Diversity of legal institutions o Common law- US UK Judges are important- wide discretion Juries and judges independent o Civil Law- Roman system Not judges but Clerks Substantive and procedural codes o Systematic variation formed over hundreds of years (with some refinements) o Importance of process of colonization English French – encompasses Spain and Portugal Sot legal tradition in former soviet union German tradition- imported by Japan **Map of laws is colored systematically by few legal traditions • Differences in how laws protect investors o Common law countries are most protective of investor and creditor rights o Quantitative measures of protection mimic law systems of origin o Outcomes also closely linked to measures of protection Appears that quality of protection is imp determinant of financial development • Relation bet. CG and Ownership concentration o Countries that make it easy to expropriate, there will be no minority shareholders o If countries protect investors, minority shareholders are protected and therefore ownership more diverse...
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- Fall '05
- Economics, common law countries, Civil Law countries