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LAW and finance

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LAW and finance Powered By Docstoc
					Rafael La Porta, Florencio Lopez-de-Silanes, and
                                 Andrei Shleifer
                               Harvard University

                               Robert W. Bishny
                             University of Chicago




                  Presentation by Dae-hee Kim
I. Overview of the Issues
   Traditional Finance(1958)
     SECURITIES are recognized by CASH FLOWS

   Recent Financial Research (1995)
     SECURITIES are defined by the RIGHTS they bring to their owners

   Co-Authors’ View
     LAW and the QUALITY of its enforcement are potentially important
      determinants of WHAT RIGHTS SECURITY HOLDERS HAVE and
      how well these rights are PROTECTED

        The differences in legal protections of investors in
        different countries are key to the different ways firms
        are financed and owned
I. Overview of Study
   Empirical Study on 49 Countries
     how their laws differ
     how their quality of enforcement varies
     whether they matter for corporate ownership patterns


   Legal Family Tree
II. Countries, Legal Families, and Legal Rules
    COUNTRIES
   Samples: countries with some nonfinancial
    firms traded on their stock exchanges
     49 countries from Europe, North/South America,
      Africa, Asia, Australia
     No socialist or “transition” economies
     Included if
      ○ on the basis of both WorldScope and Moody’s
        International samples,
      ○ had at least 5 domestic nonfinancial publicly
        traded firms with no government ownership,
      ○ in 1993
II. Countries, Legal Families, and Legal Rules
    LEGAL FAMILIES
II. Countries, Legal Families, and Legal Rules
    LEGAL RULES
   Co-authors only regard laws pertaining
    to investor protection, esp. company and
    bankruptcy/reorganization laws

     Legal relations b/t corp. insiders & corp.


     Legal relations b/t corp. & certain outsiders
     (creditors)
II. Countries, Legal Families, and Legal Rules
    LEGAL RULES
   Co-authors do not discuss
     Merger and takeover rules
      ○ except indirectly by looking at voting mechanisms

     Disclosure rules
      ○ except quality of accounting standards

     Regulations imposed by security exchanges
      ○ except exchange-imposed restrictions on the
        voting rights for the shares that companies can
        issues if they are to be traded on the exchange
     Banking and financial institution regulations
II. Countries, Legal Families, and Legal Rules
    SOME CONCEPTUAL ISSUES
?   Skeptical that legal rules are binding in most instances, since firms can opt out
    ! It may be costly for firms to opt out of standard legal rules, since
        investors might have difficulty accepting nonstandard contracts and
        judges might fail to understand or enforce them

?   Whether more restrictive rules are necessarily more protective of shareholders
    than the alternative of greater flexibility
     ! Unless enforcement is perfect, simple, restrictive, bright-line rules
        which require only a minimal effort from the judicial system to
        enforce, may be superior

?   Even if legal rules matter, these rules could merely be reflecting the differences in some other,
    exogenous conditions across countries
     ! Countries typically adopted their legal systems involuntarily.
        Even when they chose a legal system freely, the critical
        consideration was language and broad political stance of the
        law, rather than the treatment of investor protection. Therefore,
        the legal family can be treated as exogenous to a country’s
        structure of corporate ownership and finance.
    If legal rules, financing and ownership patters are all found to differ
    substantially across legal families, there is a strong case that legal
    families, as expressed in the legal rules, actually cause outcomes.
III. Shareholder Rights
to Consider for Investor Protection
1.     Remedial Rights
     l   One-share-one-vote rule
         •      Better protection when dividend rights are tightly linked to voting rights

2.       Antidirector Rights
     1       Voting by shareholder or authorized representative vs. mail proxy vote directly to firm
     2       Require shareholders deposit their shares with company or financial intermediary prior to
             a shareholder meeting, to be kept in custody
     3       Allow cumulative voting for directors or have mechanisms of proportional
             representation on the board, by which minority interests may name a proportional
             number of directors.
     4       Give minority shareholders legal mechanisms against perceived oppression by
             directors
     5       Grant preemptive right to buy new issues of stock, which can be waived only by a
             shareholder vote
     6       Percentage of share capital needed to call an extraordinary shareholders’ meeting:
             Low (Japan 3%) vs. High (Mexico 33%)

3.       Right to Mandatory Dividend
     l       May be legal substitute for the weakness of other protection of minority shareholders.
 III. Shareholder Rights
 Findings

 Common-law countries afford best legal protections to shareholders
 French-civil-law countries afford worst legal protections to shareholders
IV. Creditor Rights
to consider for (secured) creditor protection
1.   Secured creditors can pull collateral from firms being
     reorganized without waiting for completion of
     reorganization

2.   Assure secured creditors the right to collateral in
     reorganization

3.   Creditor consent is needed to file for reorganization (as
     opposed to Chapter 11)

4.   Management is replaced by a party appointed by the court
     or the creditors

5.   Remedial creditor rights measure: the existence of a legal
     reserve requirement which forces firms to maintain a
     certain level of capital to avoid automatic liquidation
IV. Creditor Rights
Findings
 Common-law countries offer creditors stronger legal protections
against managers
 French-civil-law countries offer creditors the weakest protections

 On some measures, countries in the German-civil-law family are
strongly pro-creditor

 Scandinavia, in overall, is a bit lower than that of the German family
but higher than that of the French

 Evidence indicates that these results are not a consequence of
richer countries’ having stronger investor rights; creditors have the
weakest protections in these countries
V. Enforcement
Criteria (and Findings) for determination of
protection of legal enforcement could substitute for weak rules since
A strong system
active and well-functioning courts can step in and rescue investors abused
by the management.

   Private credit risk agencies for the use of foreign investors interested in
    doing business in respective countries

   Law enforcement proper: Efficiency of judicial system, Rule of law



   Government’s stance toward business: Corruption, Risk of expropriation
    and Likelihood of contract repudiation by government

   Quality of a country’s accounting standards
V. Enforcement
Findings

   Level of per capita income may have a more
    important confounding effect than it did for the
    laws themselves.

   By every single measure, richer countries
    have higher quality of law enforcement.

   Once income is controlled for, French-civil-law
    countries still score lower on every single
    measure
VI. Ownership
    Hypothesis: Companies in countries with poor investor
     protection have more concentrated ownership of their
     shares
      Large, or even dominant, shareholders who monitor the
       managers might need to own more capital, cetris paribus, to
       exercise their control rights and thus to avoid being expropriated
       by the managers.
      When poorly protected, small investors might be willing to buy
       corporate shares only at such low prices that make it
       unattractive for corporations to issue new shares to the public.




    * Led by East Asia, where company law has been significantly influenced by US
VII. Conclusion
   Laws differ markedly around the world
     Though in most places they tend to give investors a rather
      limited bundle of rights
   Law enforcement differs a great deal around the world
    The data support the hypothesis that countries develop
    substitute mechanisms for poor investor protection
     Some are statutory, others regarding ownership concentration
     Good accounting standards and shareholder protection
      measures are associated with lower concentration of ownership

                                   CIVIL LAWS               COMMON
                                                            LAWS
                                   French    German/
                                             Scandinavian
      Legal Investor Rights        Weaker                   Stronger

      Protection (Shareholders,    Weakest   In Between     Strongest
      Creditors)
      Quality of Law Enforcement   Lowest    Highest        Next Highest

				
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