—The ‘law and finance theory’ predicts that the
common law system provides the best basis for financial
development and economic growth, followed by Scandinavian
and German origin civil law and finally French origin civil law.
This paper summarises the key points of the theory as well as a
number of sceptical views. Moreover, it argues that the theory
faces an identification problem, since the majority of common
law countries have a market-based financial system, whereas
the majority of civil law countries have a bank-based financial
system. Furthermore, it is shown that one of the corner stones of
the law and finance theory, its proposition that a common legal
tradition implies a similar set of legal rules and procedure to
protect financial investors, does not hold empirically. Last but
not least, it is shown that recent additions to the theory's
creditor right indicators data pool are eliminating the (weak)
correspondence between business law and legal family that
could be found in the original data set. Accordingly, the theory's
claim that creditor protection is largely determined by the legal
tradition of a particular country has to be reconsidered.
—Legal tradition, creditor rights, financial
Legal tradition, creditor rights, financial
Cite:Michael Graff, "Legal Origin and Financial Development: New Evidence and Old Claims," International Journal of Trade, Economics and Finance vol.3, no.3, pp. 164-166, 2012.