Following a different line of analysis the substantial empirical evidence of La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998, 1999, 2000, 2002) concerning countries with dispersed and concentrated ownership, which demonstrates differences in the legal protection of shareholders, was very influential. In many countries without adequate laws guaranteeing dispersed shareholder rights, the only alternative appeared to maintain control through concentrated ownership. This led to the conclusion the law determined the ownership structure and system of corporate finance and governance. Jurisdictions where the law was more protective encouraged the emergence of more dispersed ownership. Coffee (2001) extends La Porta et al. ’s acceptance that in the common law system there was greater flexibility of response to new developments offering better protection to shareholders to the argument that the critical role of the decentralized character of common law institutions was to facilitate the rise of both private and semi-private self-regulatory bodies in the US and UK. In contrast in civil law systems the state maintained a restrictive monopoly over law-making institutions (for example in the early intrusion of the French government into the affairs of the Paris Bourse involving the Ministry of Finance approving all new listings). Coffee (2001) concludes that it was market institutions that demanded legal protection rather than the other way around:
The cause and effect sequence posited by the La Porta et al. thesis may in effect read history backwards. They argue that strong markets require strong mandatory rules as a precondition. Although there is little evidence that strong legal rules encouraged the development of either the New York or London Stock Exchanges (and there is at least some evidence that strong legal rules hindered the growth of the Paris Bourse), the reverse does seem to be true: strong markets do create a demand for stronger legal rules. Both in the U. S. and the U. K. , as liquid securities markets developed and dispersed ownership became prevalent, a new political constituency developed that desired legal rules capable of filling in the inevitable enforcement gaps that self-regulation left. Both the federal securities laws passed in the 1930’s in the U. S. and the Company Act amendments adopted in the late 1940’s in the U. K. were a response to this demand (and both were passed by essentially “social democratic” administrations seeking to protect public securities markets). Eventually, as markets have matured across Europe, similar forces have led to the similar creation of European parallels to the SEC. In each case, law appears to be responding to changes in the market, not consciously leading it.
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