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Common Law vs. Civil Law: Which System Provides More Protection to Shareholders and Creditors and Promotes Financial Development

Prabirjit Sarkar ()

MPRA Paper from University Library of Munich, Germany

Abstract: This study re-examines the theory of legal-origin on the basis of a new longitudinal dataset for four OECD countries (UK, USA, France and Germany) over a long time span 1970-2005. It observes that the civil law countries (France and Germany) provided better minority shareholder protection and creditor protection relating to debtors’ control while the common law countries (UK and USA) provided better creditor protection relating to credit contract and insolvency. Through dynamic panel data modelling our study shows that minority shareholder protection has a long-term favourable effect only on stock market listing of firms and debtors’ control has a similar effect on credit market expansion while the credit contract component of creditor protection has the opposite effect. Thus, our study questions the proposition that common-law countries provide more protection to their shareholders and creditors; it also casts doubt on the related proposition that shareholder and creditor protection promotes financial development.

Keywords: Shareholder protection; Creditor Protection; Investor Protection; Corporate Governance; Law and Finance (search for similar items in EconPapers)
JEL-codes: G30 J38 K22 K40 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-law
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