Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Legal Origins and Modern Stock Markets

Mark Roe has written a fascinating paper at SSRN
challenging many of the conclusions of La Porta, Shleifer and others
that a common law regime favours the development of stock markets and
a civil law regime impedes it.

Roe’s first line of attack is to show empirically that the
intensity of labour regulation is a better predictor of financial
market development than legal origin. Roe goes on to link this with
the devastation that the core civil law countries suffered in the
world wars. “Early twentieth century ruin strongly predicts late 20th
century financial markets’ strength. It may explain both post-World
War II strong labor policy in the devastated nations and the
weaknesses of securities markets in the same nations.” Roe has a
nice theoretical argument to provide the linkage: “If a
nation’s middle class’ financial savings were
devastated first by inter-war hyper-inflation and depression and then
by war-time destruction of the underlying physical assets, then voters
for decades after 1945 could have cared little about financial capital
because their well-being was tied more to their human capital. ”

The second line of attack is to deny that modern securities
regulation in common law countries has any common law characteristics
left anymore. I think Roe is on strong ground here when he says that
SEC regulations are more in the civil law tradition than in the common
law tradition. People like me who thought that was merit in the common
law approach would then have to conclude that the direction in which
the SEC has taken securities regulation in the last few decades is a
big mistake.

All said, Roe has written a very thought provoking paper


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