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Projects - Details  
  Law, Finance and Development

Professor Simon F Deakin
Professor A Singh
Mr J Armour
University of Cambridge

Professor Simon Deakin
Centre for Business Research
Judge Institute of Management Studies Building
University of Cambridge
Trumpington Street

Tel: 01223 765330
email: s.deakin@cbr.cam.ac.uk
web: www.cbr.cam.ac.uk/research/programme2/project2-20output.htm

Duration of Research
March 2005 - February 2007

This interdisciplinary research project will examine the impact of legal systems on national systems of finance, and draw out the implications of legal reform for economic development. Specifically the project's aim is to carry out a constructive critique of the 'legal origins hypothesis' advanced by La Porta, Lopez-de-Silanes, Shleifer and Vishny (LLSV). This claims that systems based on the English common law are more likely than systems of civil law origin to generate, among other things, the mechanisms of shareholder protection on which liquid capital markets depend. The construction of quantitive indices of the quality of legal rules in particular countries provides the empirical basis for this finding.

While this work has been highly influential, it has yet to address some critical methodological issues. The first problem is one of casual ambiguity: LLSV's cross-sectional analyses do not take adequate account of the possibility of cumulative and interactive effects which may, over time, have influenced the relationship between law and finance. Secondly, their contrast between the common law and civil law is too sharply drawn, and fails to take into account recent work by comparative lawyers which has reassessed the role played by judges in the civil law. Thirdly, the precise mechanism of transmission from legal origin to the substantive rules of company law and corporate governance is still to be identified.

Most empirical work in this area has been cross-sectional. The reserach will complement this by constructing time series indices which will make it possible, through econometric analysis, to study the effects of legal change over time. This will be supplemented by a set of country-based case studies. Our analyses will be sensitive to the historical conditions under which financial systems in a range of countries have developed, and will take into account a greater range of factors and variables than those considered by LLSV.

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Last updated November 2005
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