Law and Finance: Why Does Legal Origin Matter?

Thorsten Beck, Asli Demirguc-Kunt and Ross Levine ()

No 9379, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: New research suggests that cross-country differences in legal origin help explain differences in financial development. This paper empirically assesses two theories of why legal origin influences financial development. First, the political' channel stresses that (i) legal traditions differ in the priority they give to the rights of individual investors vis-…-vis the state and (ii) this has repercussions for the development of property rights and financial markets. Second, the adaptability' channel holds that (i) legal traditions differ in their ability to adjust to changing commercial circumstances and (ii) legal systems that adapt quickly to minimize the gap between the contracting needs of the economy and the legal system's capabilities will foster financial development more effectively than would more rigid legal traditions. We use historical comparisons and cross-country regressions to assess the validity of these two channels. We find that legal origin matters for financial development because legal traditions differ in their ability to adapt efficiently to evolving economic conditions.

JEL-codes: G2 K2 (search for similar items in EconPapers)
Date: 2002-12
New Economics Papers: this item is included in nep-cdm, nep-com, nep-fin, nep-his and nep-law
Note: IFM LE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Published as Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.

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