| Abstract: |
The "law and finance theory" predicts that the common law system provides the
best basis for financial development and economic growth, followed by
Scandinavian and German origin civil law and finally French origin civil law.
This paper summarises the key points of the theory as well as a number of
sceptical views. Moreover, it argues that the theory faces an identification
problem, since the majority of common law countries have a market-based
financial system, whereas the majority of civil law countries have a
bank-based financial system. Furthermore, it is shown that one of the corner
stones of the law and finance theory, its proposition that a common legal
tradition implies a similar set of legal rules and procedure to protect
financial investors, does not hold empirically. Last but not least, it is
shown that recent additions to the theory's creditor right indicators data
pool are eliminating the (weak) correspondence between business law and legal
family that could be found in the original data set. Accordingly, the theory's
claim that creditor protection is largely determined by the legal tradition of
a particular country has to be reconsidered. |