The Economic Consequences of Legal Origins. Professor Andrei Shleifer Harvard University and NBER Barcelona January, 2007. Modern Theory of Corporate Finance. Earlier research on CG focused on such problems as: Managerial consumption of perquisites (Jensen and Meckling 1976),
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The Economic Consequences of Legal Origins
Professor Andrei Shleifer
Harvard University and NBER
They have owners who control and run them (LLS 1999)
Self dealing limits external finance and leads to financial underdevelopment.
Mr. James owns 90% of Seller Co. shares
Mr. James owns 60% of Buyer Co. shares
Buyer Co. buys equipment from Seller Co.
All legal approvals and required disclosures were met
To stop such cases, every country uses harsh criminal punishments.
Ex-Ante Ex-Post Public EnforcementRegulation and Income OutcomesResults
Ex-AnteEx-Post Public EnforcementRegulation and Income OutcomesResults
Ex-AnteEx-PostPublic EnforcementRegulation and Income OutcomesResults
Results Development of Stock Markets
But multicollinearity makes it difficult (corr -.46).
Instead, common law is a significant predictor of the anti-self-dealing index in both sub-samples.
Implications:Progress in the last 10 years
1. Measurement of Investor Protection2. Interpretation of Legal Origin3. Regulatory Strategies and Policy Reform
Greater disclosure and more arms-length approval.
Success may depend on general structure and efficiency of legal systems