Law, Finance, and Path Dependence: Developing Strong Securities Markets

The Article surveys the growing law and finance literature providing evidence that legal protections for minority investors (and accompanying private and public institutions) correlate with various indices of financial development. Evidence in particular exists that countries with a common law origin enjoy both strong levels of investor protection as well as superior financial performance compared with civil law origin countries. Correlation does not mean causation, however. The Article examines the evidence related to whether the legal regime in fact causes financial development. Even if the legal regime does in fact cause such development, a question remains: How to generate investor-friendly legal regimes. Evidence on the efficacy of top-down reforms, including the transplant of laws from one regime to another, is examined. As an alternative, the Article puts forth the hypothesis that increased competition (whether product market, capital market, or regulatory competition) may have a greater ability to generate lasting changes in a country's legal environment to the benefit of investors and overall welfare.