《法律与金融》课程教学资源（阅读文献）Legal Origins, Politics, and Modern Stock Markets

LEGAL ORIGINS,POLITICS, AND MODERN STOCK MARKETS Mark J.Roe TABLE OF CONTENTS INTRODUCTION 62 I.CONSIDERING LEGAL ORIGINS 468 A.The Classic Differences .469 B.Legal Origins and Financial Progress.. m470 1.Protecting Minority Stockholders via Fiduciary Duties.. ,47I 2.Overregulating Financial Markets..... 473 C.The Differences Erode D.Can Legal Origin Anchor Lw as the Primary Cause? II.STATE POWER AND LEGAL ORIGIN IN THE TWENTIETH CENTURY A.The Rise of the Regulatory State in the Twentieth Century..... .484 B.The Powver of the State... 485 A Timeline of State power in the twventieth century .486 2.Timelines of Government Budgets,Government Transfers,and Financial Market 8 3.Regulating Financial and Labo Market 488 4.Instruments and Power .491 C.Which System Regulates Securities Markets More?... .4Q1 I.Regulatory Budgets..... 40 2.The SEC 493 IIL.REEXAMINING THE DATA:DO POLITICAL ECONOMY DIFFERENCES BETTER EXPLAIN FINANCIAL DIFFERENCES? -494 A.Reexamining Legal Origins as Predicting Ownership Separation in the Wealthy West.... .405 I.Corporate Law,Legal Origin,and Legislative Policy.... 495 2.The World Wars 498 3.Invasions and Military Occupation:The Twentieth Century's Centers of Institutional De on. 499 4.Fighting Communism After the World Wars;Ignoring Capital Markets. -50I B.Politics-Based Theories for the Developed World..... .502 1.Left-Right Labor Politics. 02 2.Incumbent Capital Owners 3.TradeOpenness 4.Median Vote -50 5.Core Similaritie -5o0 6.Britain and Switzerland. .508 C.Reexamining Method:Instrumental Variables and Iterative Development5.1 460

LEGAL ORIGINS, POLITICS, AND MODERN STOCK MARKETS Mark J. Roe TABLE OF CONTENTS INTRODUCTION ............................................................................................................................ 462 I. CONSIDERING LEGAL ORIGINS ........................................................................................... 468 A. The Classic Differences ........................................................................................................ 469 B. Legal Origins and Financial Progress ................................................................................ 470 i. Protecting M inority Stockholders via Fiduciary Duties ........................................ 471 2. Overregulating Financial M arkets ................................................................................ 473 C. The Differences Erode ......................................................................................................... 475 D. Can Legal Origin Anchor Law as the Primary Cause? ............................................... 480 II. STATE POWER AND LEGAL ORIGIN IN THE TWENTIETH CENTURY ......................... 482 A. The Rise of the Regulatory State in the Twentieth Century ............................................ 484 B. The Power of the State ........................................................................................................ 485 i. A Timeline of State Power in the Twentieth Century ................................................. 486 2. Timelines of Government Budgets, Government Transfers, and Financial M arkets ......................................................................................................... 487 3. Regulating Financial and Labor M arkets .................................................................... 488 4. Instruments and Power .................................................................................................. 491 C. Which System Regulates Securities M arkets M ore? ........................................................ 491 i. Regulatory Budgets ......................................................................................................... 491 2. T he S E C ........................................................................................................................... 4 93 II. REEXAMINING THE DATA: DO POLITICAL ECONOMY DIFFERENCES BETTER EXPLAIN FINANCIAL DIFFERENCES? ............................................................ 494 A. Reexamining Legal Origins as Predicting Ownership Separation in the W ealthy W est ........................................................................................................................ 495 i. Corporate Law, Legal Origin, and Legislative Policy ................................................. 495 2. The World W ars ............................................................................................................. 498 3. Invasions and Military Occupation: The Twentieth Century's Centers of Institutional Destruction ........................................................................................... 499 4. Fighting Communism After the World Wars; Ignoring Capital Markets ................. 501 B. Politics-Based Theories for the Developed World ............................................................ 502 i. Left-Right Labor Politics ................................................................................................ 502 2. Incumbent Capital Owners ............................................................................................ 505 3. Trade Openness ............................................................................................................... 505 4. M edian V oter ................................................................................................................... 505 5. Core Similarities ..................................................................................................... 5o6 6. Britain and Switzerland ........................................................................................... 508 C. Reexamining Method: Instrumental Variables and Iterative Development .............. 511 460

2006】 WAR VS.LEGAL ORIGIN 461 IV.POLICY IMPLICATIONS FOR THE DEVELOPING WORLD. 513 CONCLUSION:POLITICAL ECONOMY VS.LEGAL ORIGIN IN EXPLAINING DIFFERENCES IN CORPORATE FINANCE APPENDIX …58

2006] WAR VS. LEGAL ORIGIN 461 IV. POLICY IMPLICATIONS FOR THE DEVELOPING WORLD .............................................. 513 CONCLUSION: POLITICAL ECONOMY VS. LEGAL ORIGIN IN EXPLAINING DIFFERENCES IN CORPORATE FINANCE .......................................... 5I A P P E N D IX ....................................................................................................................................... 5 18

LEGAL ORIGINS.POLITICS. AND MODERN STOCK MARKETS Mark J.Roe even in the world's richer nations.The main m ans are thoughi to lie in how investo suppo Mod eolities is an alte anation for and the dic financial markets'str ngth ell and tie closely to postwar dive ergences in politics and yeery core cit .ehile no core collapsed under the catastrophe. The interests and ideologies that differences in politics and tasks made one collection of the wo rld's richer natic INTRODUCTION Do legal origins-common law vs.civil law-largely determine whether capital markets develop strongly?Many finance economists have concluded,in an explosion of influential articles in the past dec- 'David Berg Professor of Law,Harvard Law School.Thanks for comments and,in four cz,Marcelo Barb osa,Thorsten ell,Mam in Ge Pete itch rta,Karl Lins,Florencio Lopez-de-Silanes amara Bertrand du rais,Dennis Muelle ohn Pottow,M Bryan Shinn,Andrei Shleifer,Holger Spamann,Lynn Stout,Guhan Subramanian,Marcelo Trin- e,Detlev Vagts,Agata Waclawik,Luigi Zingales,and those workshops at the Columbi vn, H rd,IBMEC business schools,and at the World Bank.Thanks for research support go to Harvard Law School's John M.Olin Center for Law,Economics,and Business. 462

LEGAL ORIGINS, POLITICS, AND MODERN STOCK MARKETS Mark J. Roe* Legal origin - civil vs. common law - is said in much modern economic work to determine the strength of financial markets and the structure of corporate ownership, even in the world's richer nations. The main means are thought to lie in how investor protection and property protection connect to civil and common law legal origin. But, I show here, although stockholder protection, property rights, and their supporting legal institutions are quite important, legal origin is not their foundation. Modern politics is an alternative explanation for divergent ownership structures and the differing depths of securities markets in the world's richer nations. Some legislatures respect property and stock markets, instructing their regulators to promote financial markets; some do not. Brute facts of the twentieth century - the total devastation of many key nations, wrecking many of their prior institutions - predict modern postwar financial markets' strength well and tie closely to postwar divergences in politics and policies in the world's richest nations. Nearly every core civil law nation suffered military invasion and occupation in the twentieth century - the kinds of systemic shocks that destroy even strong institutions - while no core common law nation collapsed under that kind of catastrophe. The interests and ideologies that thereafter dominated in the world's richest nations and those nations' basic economic tasks (such as postwar reconstruction for many) varied over the last half century, and these differences in politics and tasks made one collection of the world's richer nations amenable to stock markets and another indifferent or antagonistic. These political economy ideas are better positioned than legal origin concepts to explain the differing importance of financial markets in the wealthy West. INTRODUCTION Do legal origins - common law vs. civil law - largely determine whether capital markets develop strongly? Many finance economists have concluded, in an explosion of influential articles in the past dec- * David Berg Professor of Law, Harvard Law School. Thanks for comments and, in four cases, research assistance on the data go to Michael Abramowicz, Marcelo Barbosa, Thorsten Beck, Robert Clark, John Coates, Christine Desan, Simeon Djankov, Charles Donahue, Antonio Duarte, Mel Eisenberg, Allen Ferrell, Martin Gelter, Patrick Glenn, Peter Gourevitch, Claudio Haddad, Peter H6gfeldt, Howell Jackson, Rafael La Porta, Karl Lins, Florencio Lopez-de-Silanes, Tamara Lothian, Bertrand du Marais, Dennis Mueller, Richard Pierce, John Pottow, Manoj Ramachandran, Mark Ramseyer, Stefano Rossi, Alvaro Santos, Frederick Schauer, Wendy Sheu, Bryan Shinn, Andrei Shleifer, H61ger Spamann, Lynn Stout, Guhan Subramanian, Marcelo Trin￾dade, Detlev Vagts, Agata Waclawik, Luigi Zingales, and those at workshops at the Columbia, Dalhousie, Duke, George Washington, Georgetown, Harvard, NYU, Pennsylvania, Sao Paulo, and Vanderbilt law schools, at the Amsterdam, Copenhagen, Harvard, IBMEC, and Stockholm business schools, and at the World Bank. Thanks for research support go to Harvard Law School's John M. Olin Center for Law, Economics, and Business

20061 WAR VS.LEGAL ORIGIN 463 ade,that legal origin is indeed central.Common law institutions ef- fectively protect outside shareholders,it is said;civil law ones do not. This differing legal capacity to protect outside shareholders explains why some rich nations'capital markets are strong while others'are weak The developing world and inter natioma aencies are to haransplanting the correct legal cod (i.e.,the common law)will enhance economic development." new legal origins view has in key circles elbowed aside the view that (1)economic function propels stock markets:stock markets develop when technology demands large enterprises and capital must be gath- ered fr any so and th proce works when (2)polic ymaker or private players bu ld the institutions that support stock markets an (3)have enough political support that the polity does not attack fi- nance.The last element-that national politics can confine policy- makers'institution-building-has increasingly found theoretical sup- port and evidence.Here I assess which approach-legal origin or olitical e the better bet for uture research and shov olitical and policy th or the richer natic s tie into nations experienced the turmoil of the early twentieth century. Differences in corporate finance in the wealthy west in the second half of the twentieth century could well be due more to the differing consequences of the earlier World Wars than to subtle differences bet civil and co n la The re's a po owerful normative assessm ent right Many policymakers and some academics see strong financial markets as propelling economic development.3 Thus,if we better understand what makes for strong financial markets,we can better understand how to engineer economic growth,or at least how to provide a neces- sary tool. Important policymakers at international development agen a Fl Andrei shleifer robert w Vishnye.1o6 1.PoL.ECoN.I()and follow-on articles.ombte authors,many other repre sentative sample infra notes 2,4-7.For important con traDnenPijean-Francois Richard,m gality,and the Transplant Efect,47 EUR.ECON.REV. 165,166(2oo3)(summ zing and ERMEDIATION &C 5eea0K055 See,6.g,THE STATE,THE FINANCIAL SYSTEMS AND ECONOMIC MODERNIZATION (Richa 1999i Beneficial? org/papers/wpdf he financial system is like the brain of the ecor ing mechanism that allc tes capital to building factories,hou an roa No work et C IOAN ROBINSON.THE RATE OF INTER- EST AND OTHER ESSAYS 86(1952)("[W]here enterprise leads finance follows.)

WAR VS. LEGAL ORIGIN ade, that legal origin is indeed central.' Common law institutions ef￾fectively protect outside shareholders, it is said; civil law ones do not. This differing legal capacity to protect outside shareholders explains why some rich nations' capital markets are strong while others' are weak. The stakes aren't just academic. The developing world and inter￾national agencies are told that "transplanting the correct legal code (i.e., the common law) will enhance economic development."2 This new legal origins view has in key circles elbowed aside the view that (i) economic function propels stock markets: stock markets develop when technology demands large enterprises and capital must be gath￾ered from many sources, and this process works when (2) policymakers or private players build the institutions that support stock markets and (3) have enough political support that the polity does not attack fi￾nance. The last element - that national politics can confine policy￾makers' institution-building - has increasingly found theoretical sup￾port and evidence. Here I assess which approach - legal origin or political economy - is the better bet for future research and show how political and policy theories for the richer nations tie into system￾atic differences in how those nations experienced the turmoil of the early twentieth century. Differences in corporate finance in the wealthy West in the second half of the twentieth century could well be due more to the differing consequences of the earlier World Wars than to subtle differences between civil and common law. There's a powerful normative reason to get this assessment right. Many policymakers and some academics see strong financial markets as propelling economic development.3 Thus, if we better understand what makes for strong financial markets, we can better understand how to engineer economic growth, or at least how to provide a neces￾sary tool. Important policymakers at international development agen- 1 See, for example, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert W. Vishny, Law and Finance, io6 J. POL. ECON. 1113 (1998), and follow-on articles, some by these authors, many by others. I cite a representative sample infra notes 2, 4-7. For important con￾trary views, see infra section III.B, pp. 502-1 1. 2 Daniel Berkowitz, Katharina Pistor & Jean-Francois Richard, Economic Development, Le￾gality, and the Transplant Effect, 47 EUR. ECON. REV. 165, 166 (2003) (summarizing and criticiz￾ing the legal origins theory); see also Ross Levine, Law, Finance, and Economic Growth, 8 J. FIN. INTERMEDIATION 8 (999). 3 See, e.g., THE STATE, THE FINANCIAL SYSTEMS AND ECONOMIC MODERNIZATION (Richard Sylla et al. eds., 1999); Frederic S. Mishkin, Is Financial Globalization Beneficial? 3 (Nat'l Bureau of Econ. Research, Working Paper No. 11891, 2005), available at http://www.nber. org/papers/win8 9 s.pdf ("[T]he financial system is like the brain of the economy: it is a coordinat￾ing mechanism that allocates capital to building factories, houses and roads .... No work ethic can compensate for a misallocation of capital."). The contrary idea, that industrial structure calls forth finance, is associated with Joan Robinson. See JOAN ROBINSON, THE RATE OF INTER￾EST AND OTHER ESSAYS 86 (952) ("[W]here enterprise leads finance follows."). 2006]

464 HARVARD LAW REVIEW [Vol.120:460 cies such as the World Bank-staffed with economists trained under the new thinking about legal origins'centrality-denigrate civil law- style institution-building,such as ulation codification,and public enforcement Yet,by accepting the academic thinking positing th power of traditional common law tools,they may miss other needed tools not traditionally associated with the common law.And if finan- cial markets succeed only where there's a supportive polity,then build- ing the legal structures in the midst of a hostile polity would waste re- arces and risk disappointment Development dollars would be better spent elsewhere This is not to say that focusing on corporate law isn't important.It is.But it is important in the right context.The first-order condition is a polity that supports capital markets.It's only then that law becomes important and getting it wrong becomes costly.Getting corporate law right in the Un ted States important and worth of the attention receives. It is important here because the Ame ican polity supports capital markets.In other nations even wealthy ones like France, Germany,and Italy-the polity did not support capital markets in the immediate postwar decades.When such a polity changes and be. comes to markets,especially capital markets,po can make -frien dly rules fall into ace,and ithe of the two major legal origins s would much impede those rules from being effica- clous. Legal origin doesn't stop a nation from developing the institu- tions,legal and otherwise,that capital markets need.When we see a nation that doesn't do so,it's not that its legal origin bars it.Some- thing else is in play. 者米来浓 Thus,the domain here is the wealthy West,and the problem to ex- plain is why well-developed financial markets prosper in some nations and not in others.The background idea-which I take for granted but some might question is that greater financial possibilities for firms m ake growth easier If businesses c annot raise outside capital,that inability hinders economic development. So we must first understand the legal origins proponents' views How could legal origin affect finance?One way,it's been said,is that common law.by using fiduciary duties.better protects distant inves- tors than civil law does.This common law specialty can.in the hands ba http:/enricapitant.org IMG/pdf/Les_droits_de_tradition_civiliste lthe Worl Bao.p e then

HARVARD LAW REVIEW cies such as the World Bank - staffed with economists trained under the new thinking about legal origins' centrality4 - denigrate civil law￾style institution-building, such as regulation, codification, and public enforcement. Yet, by accepting the academic thinking positing the power of traditional common law tools, they may miss other needed tools not traditionally associated with the common law. And if finan￾cial markets succeed only where there's a supportive polity, then build￾ing the legal structures in the midst of a hostile polity would waste re￾sources and risk disappointment. Development dollars would be better spent elsewhere. This is not to say that focusing on corporate law isn't important. It is. But it is important in the right context. The first-order condition is a polity that supports capital markets. It's only then that law becomes important and getting it wrong becomes costly. Getting corporate law right in the United States is important and worthy of the attention it receives. It is important here because the American polity supports capital markets. In other nations - even wealthy ones like France, Germany, and Italy - the polity did not support capital markets in the immediate postwar decades. When such a polity changes and be￾comes receptive to markets, especially capital markets, policymakers can make finance-friendly rules fall into place, and neither of the two major legal origins would much impede those rules from being effica￾cious. Legal origin doesn't stop a nation from developing the institu￾tions, legal and otherwise, that capital markets need. When we see a nation that doesn't do so, it's not that its legal origin bars it. Some￾thing else is in play. Thus, the domain here is the wealthy West, and the problem to ex￾plain is why well-developed financial markets prosper in some nations and not in others. The background idea - which I take for granted but some might question - is that greater financial possibilities for firms make economic growth easier. If businesses cannot raise outside capital, that inability hinders economic development. So we must first understand the legal origins proponents' views. How could legal origin affect finance? One way, it's been said, is that common law, by using fiduciary duties, better protects distant inves￾tors than civil law does. This common law specialty can, in the hands 4 Cf. AsS'N HENRI CAPITANT DES AMIS DE LA CULTURE JURIDIQUE FRANCAIS, LES DROITS DE TRADITION CIVILISTE EN QUESTION: APROPOS DES RAPPORTS DOING BUSINESS DE LA BANQUE MONDIALE 14-15 (2oo6), available at http://henricapitant.org/ IMG/pdf/Les-droitsdetradition-civiliste-en question.pdf (describing the influence of legal ori￾gins thinking, especially in the World Bank). [VOL. 120:46o