Corporate Governance and Investor Protections

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Questions and Answers

Which legal tradition does the Scandinavian family generally belong to?

Religious law

Customary law

Common law

Civil-law tradition (correct)

How is common law primarily formed?

By public opinion

By legislative acts

By legal scholars

By judicial decisions (correct)

What is one of the key reasons investors receive dividends?

They have exclusive contracts with companies

They possess rights to vote out directors (correct)

They hold government bonds

They are guaranteed returns on investments

What factor may affect why firms are financed differently across countries?

Differences in legal protections of investors Signup and view all the answers

Why do shareholder voting rights matter in evaluating shareholder rights?

They influence major corporate decisions Signup and view all the answers

Which of the following regions predominantly implements a common law system?

The United States and Canada Signup and view all the answers

What is one reason Italian companies rarely go public?

Weak legal protections for investors Signup and view all the answers

What impact does the power to repossess collateral have on creditors?

It decreases their financial risk. Signup and view all the answers

What is the primary distinction between common law and civil law traditions?

Common law relies on legal precedents, whereas civil law relies on statutes and codes. Signup and view all the answers

Which of the following countries was NOT influenced by the French Commercial Code?

Norway Signup and view all the answers

The German Commercial Code was created after which historical event?

Bismarck's unification of Germany Signup and view all the answers

Which legal tradition is considered the oldest and most influential worldwide?

Civil law Signup and view all the answers

What role do legal scholars play in the civil law tradition?

They ascertain and formulate legal rules. Signup and view all the answers

From which family do modern commercial laws primarily derive?

French, German, and Scandinavian Signup and view all the answers

Which of the following regions was NOT significantly affected by French legal influence?

Japanese Islands Signup and view all the answers

What key feature characterizes the civil-law tradition?

Use of statutes and comprehensive codes as a primary means of ordering legal material. Signup and view all the answers

Which countries provide the strongest protections for shareholders?

Common-law countries Signup and view all the answers

What is a primary protection for senior secured creditors in the event of default?

Right to repossess and liquidate collateral Signup and view all the answers

In which type of countries are creditor rights relatively less protected?

French-civil-law countries Signup and view all the answers

What major factor complicates creditor rights compared to shareholder rights?

Different interests among various types of creditors Signup and view all the answers

What type of creditor typically wants to preserve a firm's operations during default?

Junior unsecured creditors Signup and view all the answers

Which rights do creditors lose when their rights are expanded for certain types of creditors?

The rights of other creditors Signup and view all the answers

What is a common creditor strategy when dealing with a defaulting firm?

Liquidation or reorganization Signup and view all the answers

How do protections for secured creditors in German civil-law countries compare to those in other civil-law countries?

They are stronger than in other civil-law countries. Signup and view all the answers

Which legal tradition offers the strongest protection for investors?

Scandinavian countries Signup and view all the answers

Which of the following statements about enforcement of investor rights is true?

German-civil-law countries have strong enforcement. Signup and view all the answers

What is a reason small investors might avoid purchasing shares in countries with poor investor protection?

Low prices that make purchases unattractive. Signup and view all the answers

Which country group has a legal system that tends to offer limited rights to investors?

French-civil-law countries Signup and view all the answers

Why might concentrated ownership occur in countries with weak investor protection?

His large shareholders need more capital. Signup and view all the answers

Which of the following is a feature of law enforcement quality across different countries?

German-civil-law countries and Scandinavian countries have strong law enforcement. Signup and view all the answers

What is typically true about the relationship between legal traditions and investor protection?

Common law countries protect investors better than civil law countries. Signup and view all the answers

What is the hypothesis regarding ownership concentration in countries with poor investor protection?

Poorly protected small investors only buy undervalued shares. Signup and view all the answers

Study Notes

Empirical Banking: Finance and Growth

The study examines legal rules for protecting corporate shareholders and creditors, their origin, and enforcement in 49 countries.
Common-law countries have stronger investor protections compared to French civil-law countries.
German/Scandinavian civil-law countries fall in the middle.
Higher ownership concentration in large public companies is negatively related to investor protections.

LLSV (1998) Study

The paper examines legal rules related to corporate shareholders and creditors.
It analyzes the origin of these rules and their enforcement in numerous countries.
The findings suggest common-law countries generally have stronger investor protections.
French civil-law countries have the weakest investor protections.
German and Scandinavian civil-law countries are situated in the mid-range.
Ownership concentration in large public companies is negatively correlated with investor protections (supporting the theory that dispersed shareholding is more protective).

Legal Origin

Laws in various countries are often not created from scratch but adapted or imported from other legal traditions (common law, civil law).
Common law originated in England, while civil law is rooted in Roman law.
Romano-Germanic tradition is the oldest and most common legal system.
It heavily relies on legal codes and scholars.

Origins: French, German, and Scandinavian

French Commercial Code (1807) spread throughout various territories through Napoleon's conquests.
German Commercial Code (1897) was influenced by Bismarck's unification.
It's influential in areas such as Austrian, Czech, Greek, Hungarian, Italian, and Swedish laws.
Scandinavian legal traditions are part of the broader civil-law tradition but less directly derivative of Roman law.

Legal Origins and Financial Markets

Shareholder rights are critical when company managers act in their own interests (and not in the best interest of the shareholders).
Shareholders receive dividends because they can vote and remove directors.
Creditors get paid as they can repossess collateral.
Differences in legal protections impact how firms are financed and structured, demonstrating the difference in financial systems across countries.
Examples: Italian firms rarely go public.
German stock markets are smaller, but have robust banks.
Differences in voting rights on shares shows disparity in investor protections in different countries.

Shareholder Rights

Experts evaluate shareholder rights by examining voting procedures, including methods to counteract insider interference.
Better investor protections exist when dividend rights are linked to voting rights.
Common-law nations tend to offer the best protections for shareholders, with French civil-law countries offering the weakest protections, and German/Scandinavian civil law countries between them, independent of income levels.

Creditor Rights

Creditor rights are more complex than shareholder rights due to different creditor interests and reorganization strategies.
Senior creditors have priority in default cases.
General creditor strategies involves liquidation and reorganization.
The method of deal with the defaulting firm varies by different legal origins (with various level of protection).

Enforcement

A robust legal enforcement system acts like a reserve option for weak rules for investors.
Proxy measures of law and order offer estimates of quality of enforcement for investors.
Civil-law nations generally have stronger law-enforcement than French civil-law.
Common law countries fall in between Scandinavian and French civil-law countries.

Ownership

Companies in countries with weak investor protection have more concentrated ownership of shares.
Large shareholders who monitor managers need more capital to exercise their rights.
Poor protections discourage small investors.

Conclusion

Legal systems across nations show substantial variation, and legal origins strongly predict economic outcomes.
Scandinavian and German civil-law nations provide more effective legal enforcement compared to French civil-law nations.
Legal origin theory suggests that countries often develop substitute mechanisms to enhance creditor and investor protections.

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Description

This quiz explores empirical banking and the legal frameworks surrounding corporate governance and investor protections across various countries. It discusses the differences in protections between common-law and civil-law countries, as well as the impact of ownership concentration on investor security. Test your understanding of these critical financial concepts!