Law and Finance Theory Sample Clauses

Law and Finance Theory. The first and most influential theory that has been used to explain differences in investor protection is the “law and finance” explanation suggested by La Porta et al. (1998). This work is referenced in virtually every subsequent work on investor protection and expanded upon in various successor projects by the original authors and others (ex. Xxxx, Demirgüç-Kunt, and Xxxxxx 2003, Djankov et al. 2008, Djankov, McLeish and Xxxxxxxx 0000, Xx Xxxxx, Xxxxx-De-Silanes and Shleifer 2008). Law and finance theory focuses on legal heritage. The key insight made by law and finance theory is that countries rarely develop their legal systems from whole cloth. Rather, countries tend to have adopted (through colonization or other means) one of a relatively small group of legal systems. One prominent legal system is common law, which operates in the United Kingdom and in most former British colonies, including the United States and Canada. The major alternative to common law is civil law, which operates, in one or another of its several variants, in the majority of the world's countries.5 The main difference between common law and civil law is that common law relies on judges to create a body of law that is to be respected in future cases (stare decisis). In civil law systems, by contrast, rule making falls entirely to the legislature; the role of judge is simply to apply these laws. Law and finance theorists argue that common law's emphasis on the judicial role in law making allows those countries to protect investors better because they can more easily update laws and apply them to quickly evolving dynamics in the business world. Judges in civil law countries lack this latitude and, as a result, managers can more easily find new ways to expropriate from shareholders that remain within the letter, if not the spirit, of the law (La Porta et. al. 2000). Despite its influence, law and finance theory has been heavily criticized (ex. Rajan and Zingales 2003, Gourevitch and Xxxxx 2005, Xxx 2003, Spamann 2008). Two 5 These clusters within civil law include the French variant , which was spread spread through Europe by Napoleon and throughout the world by French and Spanish colonial empires. French civil law is used in France, Belgium, Spain and the majority of Latin American, East and South East Asian and African countries. The German variant of civil law operates throughout much of central Europe, as well as Japan. A Scandinavian variant is used throughout that region. Other...