“Leximetrics,” which involves quantitative measurement of law, has become a prominent feature in empirical work done on comparative corporate governance, with particular emphasis being placed on the contribution that robust shareholder protection can make to a nation’s financial and economic development. Using this literature as our departure point, we are currently engaging in a leximetric analysis of the historical development of U.S. corporate law. Our paper, Law and History by Numbers: Use, But With Care, prepared for a University of Illinois College of Law symposium honoring Prof. Larry Ribstein, is part of this project. We identify in this paper various reasons for undertaking a quantitative, historically-oriented analysis of U.S. corporate law. The paper focuses primarily, however, on the logistical challenges associated with such an inquiry.
Posts Tagged ‘Legal systems’
Over recent decades, corporate governance has become an increasingly high profile aspect of legal scholarship and practice. But despite this widespread interest, there remains considerable uncertainty about how exactly corporate governance should be defined or understood. Of particular concern is whether corporate governance is most appropriately understood as an aspect of ‘private’ (facilitative) law, or else as a part of ‘public’ (regulatory) law. In my recent book, Corporate Governance in the Shadow of the State (2013, Hart Publishing), I demonstrate that this question is not just an academic one in the pejorative sense. On the contrary, it is arguably the most important issue confronting those who study or teach the subject of corporate governance in any level of depth or analytical rigour.
Diversification is the best protection investors have from the risks of capital investment. Modern portfolio theory requires that investors diversify their holdings by investing in firms whose financial returns are influenced by different factors. That has traditionally meant investing in firms in different industries. The object is to identify the factors that could cause a firm’s return to vary from what is expected and to invest in firms that differ with regard to those elements of risk. By employing this investment strategy, investors can “diversify away” firm-specific risks.
In my forthcoming Essay, Legal Diversification, I introduce a new dimension along which investors can diversify. “Legal diversification” is an investment strategy whereby investors purchase securities governed by different legal rules in order to diversify away the risk that any one set of legal rules will fail to adequately limit the agency costs of business management. An investor may hold a diversified portfolio of stocks in different kinds of public corporations, but that portfolio would not necessarily be legally diversified. A portfolio would be legally diversified if it contained various kinds of securities issued by privately held limited liability companies, public corporations, emerging growth companies, and various derivatives. By holding a diversified portfolio of investments in firms and securities governed by different legal rules, investors can enjoy some protection from the failures of a particular legal regime while also sampling the benefits more successful regimes offer.
In our forthcoming article, Regulating Ex Post: How Law Can Address the Inevitability of Financial Failure, 92 Texas Law Review (2013), we observe that, unlike many other areas of regulation, financial regulation operates in the context of a complex interdependent system. This, we argue, has implications for financial regulatory policy, especially the choice between ex ante regulation aimed at preventing financial failures and ex post regulation aimed at responding to those failures.
Our article begins by considering the nature of systems and the usefulness of systems analysis as a methodology for studying law. Law-related systems are systems in which the law is an integral element. The financial system can be viewed as a complex network in which financial firms interact directly and indirectly (through markets) against the background of legal rules.
There has been an exponential growth in interest in comparative company law in recent years. For example, in the period from 2002 to 2011, no fewer than ten monographs or edited collections were published exploring this new field of enquiry. The burgeoning literature was mirrored by an increase in University Postgraduate courses or programs in comparative company law and corporate governance. Moreover, the dissolution of trade barriers and mass cross-border capital flows engendered by the forces of competition and globalization have necessitated legal practitioners to be conversant with the company laws of jurisdictions other than their own.
In Mathias Siems and David Cabrelli (eds.), Comparative Company Law: A Case Based Approach, Hart Publishing, 2013 (publisher’s website; introduction on SSRN) we have aimed to fill an important gap in this field. Existing books on comparative company law tend to focus on the institutional structure of the corporation but this approach risks overlooking specific cases and how the issues arising from disputes are resolved in different jurisdictions. For example, topics related to directors’ liability, creditor protection and shareholders’ rights may best be understood by analyzing how selected hypothetical cases would be solved in different countries.
The paper, Towards a Legal Theory of Finance, develops the building blocks for a legal theory of finance (LTF). By placing law at the center of the analysis of financial systems LTF sheds light on the construction of financial markets, their interconnectedness and thus vulnerability to crisis, and situates power where law is elastic or suspended in the name of financial stability. LTF has four elements: It holds that modern financial markets are (1) rule-bound systems; (2) essentially hybrid; (3) beset by the law-finance paradox; (4) and in the last instance subject to discretionary rather than rule-bound actions.
Among the most important rights of shareholders is the right to elect and dismiss directors. While the election of directors usually garners a lot of attention among scholars and policymakers, the same cannot be said of the right to dismiss directors, even though it is at least of equal concern. In my paper, Europe’s Ius Commune on Director Revocability, which was recently made available on SSRN, I explore the neglected topic of the latitude of shareholder meetings to remove directors of public companies over time and across several jurisdictions in Europe and the United States. The specific question relates to whether the law mandatorily prescribes that shareholders have the right to remove directors at will, and whether common principles can be distilled at a regional or international level.
In the paper, Law and Financial Development: What We Are Learning from Time-Series Evidence, which was recently made publicly available on SSRN, my co-authors (Simon Deakin at the University of Cambridge; Viviana Mollica at Queen Mary University of London; and Mathias Siems at the University of East Anglia) and I explore the empirical evidence regarding the legal origins hypothesis. It is widely believed that legal institutions matter for financial development. According to the ‘legal origins’ hypothesis developed by La Porta et al. and their collaborators, legal systems vary considerably in the way they regulate economic activity. A principal cause of this diversity is the role played by the different legal traditions or ‘origins’ of the common and civil law (La Porta et al., 2008). It is argued that countries whose legal systems have a common law origin emphasize freedom of contract and the protection of private property, whereas those with civil law roots favor an activist role for the state. These legal differences seem to have tangible economic effects. Common law systems have been found to have more dispersed share ownership (La Porta et al., 1999), more liquid and extensive capital markets (La Porta et al., 1998), and more highly developed systems of private credit, than civilian ones. In part through the Doing Business reports of the World Bank, these findings have come to influence policy reform in ‘dozens of countries’ over the past decade (La Porta et al., 2008:326). Reforms to corporate and bankruptcy law have seen a strengthening of shareholder and creditor rights, particularly the former.
In the paper, System and Evolution in Corporate Governance, which was recently made publicly available on SSRN, my co-author, Fabio Carvalho, and I explore the relevance of systems theory for an understanding of legal evolution, with specific reference to the law and practice of corporate governance. Evolutionary ideas play an important role in the contemporary corporate governance debate, being regularly deployed to support deregulatory initiatives and encourage belief in the likelihood of the global convergence of governance regimes. Close inspection suggests that many of these analyses are based on false analogies, drawn from misunderstandings of natural selection processes in the biological realm. They also suffer from a failure to address the issue of the social ontology of law. The key assumption in most law and economics analyses is that legal rules operate as surrogate prices. Given the importance of this step in law and economics reasoning, it is surprising that so little attention has been given to articulating and defending it. The effect, though, is severely to limit the value of the resulting analyses, by dissolving the distinction between the legal and economic systems.
In our paper, Is the World Flat? Country- and Firm-Level Determinants of Law Compliance, which was recently accepted for publication in The Journal of Law, Economics, and Organization, we revisit the effects of a country’s institutional framework on individual firms’ behavior, in particular focusing on their propensity to comply with legal rules. We focus on the compliance with legal rules, primarily for two reasons. The substantive one has to do with the apparent importance of institutions such as the rule of law and legal enforcement for economic performance. The practical reason is that our data contain proxies for law compliance by thousands of business firms from a wide range of countries that display large institutional variation.
While the data contain information on several aspects of law compliance, such as the scope of corruption, bribery, and the extent of informality—by which we mean the propensity of firms to hide output—the main analysis focuses on the latter. This analysis reveals that many of the available firm-level characteristics are indeed relevant for explaining the variation in informality. For example, firm size matters; smaller firms appear to be hiding a larger share of output, while exporting firms and those with foreign ownership appear to be hiding less. Yet, there is strong evidence that most of the variation is driven by differences across countries in their respective levels of institutional quality, thus rejecting the null hypothesis in favor of what is implied by our theoretical model. In particular, commonly used measures of institutional strength emerge as the most statistically significant variables.
We use the same methodology to explain the variation in other proxies for noncompliance with the rule of law, such as corruption and bribery. Generally, the results are similar to—and often even stronger than—those obtained for informality: while firm characteristics matter, most of the relevant variation is explained by country-wide measures for institutional strength, and less so by firm-specific characteristics.
Our conclusion is that countries still matter in providing institutional infrastructure, which determines to a large extent the context within which firms operate.
The full paper is available for download here.