Towards A Political Explanation of Investor Protection Sample Clauses

Towards A Political Explanation of Investor Protection. The most prominent explanation for variation in corporate governance policy is “law and finance” theory originally posed by La Porta et al. (1998, 2000). The law and finance approach focuses on whether a country bases its legal system on common law (the British legal system) or civil law (best exemplified by the French legal system). The key distinction is that common law allows judges great latitude to create and update laws through judicial precedent, while civil law judges are considerably more constrained. Consequently, under civil law, “a corporate insider who finds a way not explicitly forbidden by the statutes to expropriate outside investors can proceed without fear of an adverse judicial ruling” (La Porta et al. 2000: 9). The legal heritage argument is a controversial one, and has been challenged by numerous academics across several disciplines (ex. Gourevitch and Xxxxx 2005, Rajan and Zingales 2000, Xxx 2003, Spamann 2006). One glaring limitation is that legal heritage is a static variable, yet many countries' corporate governance and securities law regimes have changed considerably over time By definition, legal heritage cannot explain these “great reversals” (Rajan and Zingales 2003). Another important limitation 4 This table also suggests the importance of measures of investor protection that includes enforcement, as well as laws on the books. Clearly, Switzerland is a safer place to put your money than the Democratic Republic of Congo. This issue is taken up in chapter 4. of the legal heritage argument is that it cannot be used to explain sub-federal variation among political units that, by definition, share the same legal heritage. However, the most important limitation of the legal heritage argument is that it is apolitical. It ignores completely the role of interest groups and politicians in shaping the law, and the various incentives that they may or may not have for advancing a particular policy platform. In the decade since La Porta et al. first proposed their theory, a variety of economists, political scientists and legal scholars have advanced alternative, political theories to explain variation in corporate governance practices. These political theories begin by acknowledging that the broad gains from investor-friendly corporate governance rules and securities laws come at the expense of corporate insiders who lose out on rent- seeking opportunities. In general, these political theories argue that whichever groups – managers, majorit...