The discussion of laws in the financial area and the relationship between law and finance originates back to Ronald Coase (1960).
The Coase Theorem proposes that problems between issuers and investors are resolved through private contracting with the consequence of efficient markets. The past shows that the Coase Theorem in its purest form, which abandons transaction costs, is not applicable to investor – issuer- relationships, because the existence of transaction costs makes the enforcement of private contracts inefficient. Therefore judicially – enforced and government – enforced laws/ regulations have developed, in order to make contracting and thus the financial market more efficient.
The aim of this paper is to explain to the reader the interdependencies that exist between law and finance by explaining law and finance issues on a theoretical basis and by finally showing the influence of globalization on these law and finance issues.
Important developments are presently happening in the law and finance area of global corporations aiming at a further convergence of both law and finance. Although these developments are to a large extent driven by capital market needs, they will also have consequences for the accounting area in general, regulatory issues and for companies which have not yet decided to turn to the capital markets in order to satisfy their need for capital.
[...]
Table of Contents
1. Introduction
2. Legal and regulatory systems
2.1 Major legal systems in the world
2.2. The legal framework in an economy
2.3 Characterisation of differences in national legal and regulatory systems
2.3.1 Principal Agent Theorem
2.3.2 Shareholders
2.3.2.1 Interdependence between legal systems and shareholder protection
2.3.2.2 Shareholder protection and dividend payoff
2.3.2.3 Influence of investor protection on finance and economy
2.3.3. Corporate Ownership Structure
2.3.3.1 A historical view
2.3.3.2 Triggers for concentration
2.3.3.3 Structure of concentration
2.3.3.4 A critical analysis
2.3.4 Creditor Rights
2.3.5 Soundness of contract enforcement
2.3.6 Level of corporate accounting standards
2.4 Impact of the legal and regulatory environment on Financial Intermediates and on economic growth
2.4.1 Legal and financial framework and firm growth
2.4.2 Financial Intermediaries and Growth
3. Globalization of Law and Finance
3.1 The phenomenon of Convergence
3.1.1 Convergence in financial markets
3.1.2 Convergence of Accounting Practices
3.1.2.1 Institutional Framework
3.1.2.2 Harmonisation Initiatives
3.2 International regulatory cooperation
3.2.1 Regulatory issues and networks
3.2.2 Standard setting instead of strict rules and recent developments in international regulation
3.2.3 Barriers to International Regulatory Cooperation
4. Conclusion
Research Objectives and Core Themes
This paper examines the fundamental interdependencies between legal systems, regulatory frameworks, and financial development. It explores how legal origins—specifically the distinction between civil and common law—shape shareholder and creditor protection, influence corporate ownership structures, and ultimately affect external financing and long-term economic growth, while also addressing the modern trend toward the globalization and convergence of legal and financial standards.
- The relationship between national legal traditions (Civil vs. Common Law) and investor protection.
- Corporate governance mechanisms, including the separation of ownership and control and the Principal Agent Theorem.
- The impact of regulatory environments on external finance and economic performance.
- Globalization drivers and the resulting convergence of accounting practices and financial markets.
- Challenges and strategies for international regulatory cooperation in a global economy.
Excerpt from the Book
2.1 Major legal systems in the world
Although each country in the world has its own legal system tied to its political unit, 90% of all the different legal systems originate from two main legal traditions: the civil or common law. The reason for the development of many different legal systems is that the two main legal traditions, either the civil law tradition or the common law tradition, were adapted to the social and cultural context of each country.
The civil law has a major impact on the world, since more than 60% of the world population is influenced by this tradition. The Latin terminus “ius civile” was first used in the Roman Republic in order to describe actions between citizens. Over the following decades a law, named civil law, which was highly influenced by the Roman law, developed. The civil law represents a group of laws made by legislative authorities. These laws consist of several detailed codes, which are characterised by a high level of abstraction. The interpretation and application of those laws is left to the judges in the courts.
Summary of Chapters
1. Introduction: This chapter introduces the historical and theoretical context of the relationship between law and finance, setting the stage for an analysis of how legal frameworks influence economic development and globalization.
2. Legal and regulatory systems: This section provides a deep dive into the two major legal traditions (civil and common law), their impact on shareholder and creditor rights, and their subsequent influence on corporate ownership and the growth of financial intermediaries.
3. Globalization of Law and Finance: This chapter analyzes how market competition and technological advancements are driving the convergence of financial markets and accounting practices, and explores the challenges of international regulatory cooperation.
4. Conclusion: This final chapter synthesizes the main findings, confirming that legal origins are a primary determinant of financial development and emphasizing the increasing necessity for global regulatory coordination to foster economic growth.
Keywords
Law and Finance, Civil Law, Common Law, Investor Protection, Corporate Governance, Principal Agent Theorem, Shareholder Protection, Creditor Rights, Ownership Concentration, Financial Intermediaries, Globalization, Convergence, Accounting Standards, Economic Growth, Regulatory Cooperation.
Frequently Asked Questions
What is the primary focus of this work?
The paper fundamentally explores the interdependencies between national legal systems and the functioning of financial markets, assessing how law influences economic outcomes globally.
What are the central thematic fields covered?
Key themes include legal traditions, corporate governance, the mechanisms of shareholder and creditor protection, the role of financial intermediaries in economic growth, and the globalization of regulatory frameworks.
What is the primary research goal?
The main objective is to explain how differences in legal environments affect the efficiency of financial markets and how these differences influence corporate behavior and national economic development.
Which scientific methods are applied?
The work utilizes a comparative analytical approach, synthesizing existing literature on law, corporate finance, and governance to draw correlations between legal frameworks and institutional performance.
What is covered in the main body of the paper?
The main body covers the theoretical distinction between civil and common law, an investigation into ownership structures, the impact of creditor/shareholder protection on market growth, and an evaluation of global convergence in accounting and regulatory standards.
Which keywords characterize the work?
Central terms include Law and Finance, Corporate Governance, Investor Protection, Globalization, and Economic Growth.
How does the legal origin affect ownership concentration?
Countries with weaker legal protection for investors typically exhibit higher ownership concentration, as large shareholders become a necessary substitute for effective legal oversight.
What is the significance of the "Principal Agent Theorem" in this study?
It serves as the theoretical foundation for understanding the conflict of interest between corporate insiders and outside investors, which drives the necessity for different corporate governance mechanisms around the world.
- Quote paper
- Christoph Trixl (Author), 2001, Law and Finance, Munich, GRIN Verlag, https://www.grin.com/document/1155
