HOW DO LEGAL RULES EVOLVE? EVIDENCE FROM A CROSS-COUNTRY COMPARISON OF SHAREHOLDER,CREDITOR AND WORKER PROTECTION Centre for Business Research,University Of Cambridge Working Paper No.382 European Corporate Governance Institute Law Working Paper No.129/2009 by John Armour Simon Deakin Lovells Professor of Law and Finance Centre for Business Research University of Oxford University of Cambridge Oriel College Judge Business School Building Oxford OX1 4EW Cambridge CB2 1AG Email:john.armour@law.ox.ac.uk Email:s.deakin@cbr.cam.ac.uk Priya Lele Mathias M Siems Ashurst LLP and The Norwich Law School Centre for Business Research University of East Anglia University of Cambridge Norwich NR4 7TJ Judge Business School Building Email:mathias.siems @gmx.de Cambridge CB2 1AG Email:lelepriya@hotmail.com This working paper forms part of the CBR Research Programme on Corporate Governance. It can be downloaded without charge from the Social Science Research Network elec- tronic library at:http://ssrn.com/abstract=1431008 Further information about the Centre for Business Research can be found at the following address:www.cbr.cam.ac.uk Electronic copy available at:http://ssrn.com/abstract=1431008
Electronic copy available at: http://ssrn.com/abstract=1431008 HOW DO LEGAL RULES EVOLVE? EVIDENCE FROM A CROSS-COUNTRY COMPARISON OF SHAREHOLDER, CREDITOR AND WORKER PROTECTION Centre for Business Research, University Of Cambridge Working Paper No. 382 European Corporate Governance Institute Law Working Paper No. 129/2009 by John Armour Lovells Professor of Law and Finance University of Oxford Oriel College Oxford OX1 4EW Email: john.armour@law.ox.ac.uk Simon Deakin Centre for Business Research University of Cambridge Judge Business School Building Cambridge CB2 1AG Email: s.deakin@cbr.cam.ac.uk Priya Lele Ashurst LLP and Centre for Business Research University of Cambridge Judge Business School Building Cambridge CB2 1AG Email: lelepriya@hotmail.com Mathias M Siems The Norwich Law School University of East Anglia Norwich NR4 7TJ Email: mathias.siems@gmx.de This working paper forms part of the CBR Research Programme on Corporate Governance. It can be downloaded without charge from the Social Science Research Network electronic library at: http://ssrn.com/abstract=1431008 Further information about the Centre for Business Research can be found at the following address: www.cbr.cam.ac.uk
european corporae ernance institute ecg How Do Legal Rules Evolve?Evidence From a Cross-Country Comparison of Shareholder, Creditor and Worker Protection Law Working Paper N.129/2009 John Armour July 2009 University of Oxford,Oxford-Man Institute of Quantitative Finance and ECGI Simon Deakin University of Cambridge and ECGI Priya Lele Ashurst LLP and University of Cambridge Mathias M Siems University of East Anglia(UEA)and University of Cambridge John Armour,Simon Deakin,Priya Lele and Mathias M Siems 2009.All rights reserved.Short sections of text,not to exceed two paragraphs,may be quoted without explicit permission provided that full credit,including notice,is given to the source. This paper can be downloaded without charge from: http://ssrn.com/abstract=1431008. www.ecgi.org/wp
Electronic copy available at: http://ssrn.com/abstract=1431008 Law Working Paper N°.129/2009 July 2009 John Armour University of Oxford, Oxford-Man Institute of Quantitative Finance and ECGI Simon Deakin University of Cambridge and ECGI Priya Lele Ashurst LLP and University of Cambridge Mathias M Siems University of East Anglia (UEA) and University of Cambridge © John Armour, Simon Deakin, Priya Lele and Mathias M Siems 2009. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. This paper can be downloaded without charge from: http://ssrn.com/abstract=1431008. www.ecgi.org/wp How Do Legal Rules Evolve? Evidence From a Cross-Country Comparison of Shareholder, Creditor and Worker Protection
european corporate governance institute ECGI Working Paper Series in Law How Do Legal Rules Evolve?Evidence From a Cross-Country Comparison of Shareholder, Creditor and Worker Protection Working Paper N.129/2009 July 2009 John Armour Simon Deakin Priya Lele Mathias M Siems The work reported here was carried out at the Centre for Business Research,University of Cambridge,as part of the 'law,finance and development'project (http://www.cbr.cam.ac.uk/ research/programme2/project2-20.htm). We gratefully acknowledge funding from the ESRC's'World Economy and Finance'Programme, the Newton Trust,and the EU Sixth Research and Development Framework Programme(Integrated Project 'Reflexive Governance in the Public Interest').We are also grateful for comments from participants in seminars at Berlin,Cambridge,Doshisha,Leicester,the LSE,Manchester,NYU, Texas and York,where earlier versions of this work were presented.We also thank Bernie Black, Brian Cheffins,Frederique Dahan,Sonja Fagernas,Katharina Pistor,Prabirjit Sarkar and Ajit Singh for helpful comments and discussions,and Rose-Alice Murphy,Viviana Mollica and Phil Fellowes for outstanding research assistance.The remaining errors are entirely our responsibility. John Armour,Simon Deakin,Priya Lele and Mathias M Siems 2009.All rights reserved.Short sections of text,not to exceed two paragraphs,may be quoted without explicit permission provided that full credit,including notice,is given to the source. Electronic copy available at:http://ssrn.com/abstract=1431008
Electronic copy available at: http://ssrn.com/abstract=1431008 ECGI Working Paper Series in Law Working Paper N°.129/2009 July 2009 John Armour Simon Deakin Priya Lele Mathias M Siems How Do Legal Rules Evolve? Evidence From a Cross-Country Comparison of Shareholder, Creditor and Worker Protection The work reported here was carried out at the Centre for Business Research, University of Cambridge, as part of the ‘law, fi nance and development’ project (http://www.cbr.cam.ac.uk/ re search/pro gramme2/project2-20.htm). We gratefully acknowledge funding from the ESRC’s ‘World Economy and Finance’ Programme, the Newton Trust, and the EU Sixth Research and Development Framework Programme (Integrated Project ‘Refl exive Governance in the Public Interest’). We are also grateful for comments from participants in seminars at Berlin, Cambridge, Doshisha, Leicester, the LSE, Manchester, NYU, Texas and York, where earlier versions of this work were presented. We also thank Bernie Black, Brian Cheffi ns, Frederique Dahan, Sonja Fagernäs, Katharina Pistor, Prabirjit Sarkar and Ajit Singh for helpful comments and discussions, and Rose-Alice Murphy, Viviana Mollica and Phil Fellowes for outstanding research assistance. The remaining errors are entirely our responsibility. © John Armour, Simon Deakin, Priya Lele and Mathias M Siems 2009. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source
Abstract Much attention has been devoted in recent literature to the claim that a country's 'legal origin'may make a difference to its pattern of financial development and more generally to its economic growth path.Proponents of this view assert that the 'family'within which a country's legal system originated-be it common law, or one of the varieties of civil law-has a significant impact upon the quality of its legal protection of shareholders,which in turn impacts upon economic growth,through the channel of firms'access to external finance.Complementary studies of creditors'rights and labour regulation have buttressed the core claim that different legal families have different dynamic properties.Specifically,common law systems are thought to be better able to respond to the changing needs of a market economy than are civilian systems.This literature has,however,largely been based upon cross-sectional studies of the quality of corporate,insolvency and labour law at particular points in the late 1990s.In this paper,we report findings based on newly constructed indices which track legal change over time in the areas of shareholder,creditor and worker protection.The indices cover five systems for the period 1970-2005:three'parent'systems,the UK,France and Germany;the world's most developed economy,the US;and its largest democracy,India.The results cast doubt on the legal origin hypothesis in so far as they show that civil law systems have seen substantial increases in shareholder protection over the period in question.The pattern of change differs depending on the area which is being examined,with the law on creditor and worker protection demonstrating more divergence and heterogeneity than that relationg to shareholders.The results for worker protection are more consistent with the legal origin claim than in the other two cases,but this overall result conceals significant diversity within the two 'legal families',with different countries relying on different institutional mechanisms to regulate labour.Until the late 1980s the law of the five countries was diverging,but in the last 10-15 years there has been some convergence,particularly in relation to shareholder protection. Keywords:legal origin,corporate governance,company law,insolvency law,labour law JEL Classifications:G38.K22.K31.P50 John Armour University of Oxford-Faculty of Law Oriel College Oxford,OX1 4EW,United Kingdom phone:+44 1865 286544,e-mail:john.armour@law.ox.ac.uk Simon Deakin University of Cambridge-Centre for Business Research(CBR) Top Floor,Judge Business School Building Trumpington Street Cambridge CB2 1AG,United Kingdom phone:+44 1223 335243,e-mail:s.deakin@cbr.cam.ac.uk Priya Lele Ashurst LLP Broadwalk House 5 Appold Street London,EC2A 2HA,Great Britain e-mail:lelepriya@hotmail.com Mathias M Siems University of East Anglia(UEA),Norwich Law School Norwich NR4 7TJ,Norfolk,United Kingdom HOME PAGE:http://www.uea.ac.uk/law/msiems e-mail:mathias.siems@gmx.de
Abstract Much attention has been devoted in recent literature to the claim that a country’s ‘legal origin’ may make a difference to its pattern of fi nancial development and more generally to its economic growth path. Proponents of this view assert that the ‘family’ within which a country’s legal system originated—be it common law, or one of the varieties of civil law—has a signifi cant impact upon the quality of its legal protection of shareholders, which in turn impacts upon economic growth, through the channel of fi rms’ access to external fi nance. Complementary studies of creditors’ rights and labour regulation have buttressed the core claim that different legal families have different dynamic properties. Specifi cally, common law systems are thought to be better able to respond to the changing needs of a market economy than are civilian systems. This literature has, however, largely been based upon cross-sectional studies of the quality of corporate, insolvency and labour law at particular points in the late 1990s. In this paper, we report fi ndings based on newly constructed indices which track legal change over time in the areas of shareholder, creditor and worker protection. The indices cover fi ve systems for the period 1970-2005: three ‘parent’ systems, the UK, France and Germany; the world’s most developed economy, the US; and its largest democracy, India. The results cast doubt on the legal origin hypothesis in so far as they show that civil law systems have seen substantial increases in shareholder protection over the period in question. The pattern of change differs depending on the area which is being examined, with the law on creditor and worker protection demonstrating more divergence and heterogeneity than that relationg to shareholders. The results for worker protection are more consistent with the legal origin claim than in the other two cases, but this overall result conceals signifi cant diversity within the two ‘legal families’, with different countries relying on different institutional mechanisms to regulate labour. Until the late 1980s the law of the fi ve countries was diverging, but in the last 10-15 years there has been some convergence, particularly in relation to shareholder protection. Keywords: legal origin, corporate governance, company law, insolvency law, labour law JEL Classifications: G38, K22, K31, P50 John Armour University of Oxford - Faculty of Law Oriel College Oxford, OX1 4EW, United Kingdom phone: +44 1865 286544, e-mail: john.armour@law.ox.ac.uk Simon Deakin University of Cambridge - Centre for Business Research (CBR) Top Floor, Judge Business School Building Trumpington Street Cambridge CB2 1AG, United Kingdom phone: + 44 1223 335243, e-mail: s.deakin@cbr.cam.ac.uk Priya Lele Ashurst LLP Broadwalk House 5 Appold Street London, EC2A 2HA, Great Britain e-mail: lelepriya@hotmail.com Mathias M Siems University of East Anglia (UEA), Norwich Law School Norwich NR4 7TJ, Norfolk, United Kingdom HOME PAGE: http://www.uea.ac.uk/law/msiems e-mail: mathias.siems@gmx.de
1.Introduction Much attention has been devoted in recent literature to the claim that a country's legal origin'may make a difference to its pattern of financial development and more generally to its economic growth path.Proponents of this view assert that the family'within which a country's legal system originated-be it common law,or one of the varieties of civil law-has a significant impact upon the quality of its legal protection of investors,which in turn impacts upon economic growth,through the channel of firms'access to external finance.Complementary studies of,amongst other things,creditors' rights and labour regulation have buttressed the core claim that different legal families have different dynamic properties.Specifically,common law systems are said to be better able to respond to the changing needs of a market economy than are civilian systems.This literature has,however,largely been based upon cross-sectional studies of the quality of various aspects of corporate and financial law at particular points in the late 1990s.Whilst some correlations between patterns of financial development and legal institutions have been established,the issue of causation remains contentious. Given this background,at least two types of study can potentially contribute to our understanding of the links between law and financial development.One approach,which focuses on outcomes,would be to investigate the links between legal rules and indicia of financial market development,and economic development more widely,over time.This would call for the construction of time series data on legal variables of interest.Quantitative methodology could be used to test the hypothesis that changes in legal rules precede financial market development(or indeed the inverse).A related approach,focusing more on mechanisms,might examine the way in which the strength of the protection of particular types of constituency changes over time.Panel data comprising some civil and some common law countries would allow for examination of whether there are systematic differences in the pattern of evolution in different legal systems.If,as posited,the mechanisms of legal evolution are significantly different in common and civil law systems,we would expect to see change occurring at different speeds,and plausibly in different directions,in systems of each variety.Conversely,we might not expect to see as much variety between members of the same legal origin as between members of different legal origins. This paper follows the second approach outlined above.Further,it uses a quantitative methodology,which may also be called 'numerical comparative law'or 'leximetrics'(Siems 2005a;Lele and Siems 2007a).We present new longitudinal indices of legal rules applicable to business enterprise-grouped
1 1. Introduction Much attention has been devoted in recent literature to the claim that a country’s ‘legal origin’ may make a difference to its pattern of financial development and more generally to its economic growth path. Proponents of this view assert that the ‘family’ within which a country’s legal system originated—be it common law, or one of the varieties of civil law—has a significant impact upon the quality of its legal protection of investors, which in turn impacts upon economic growth, through the channel of firms’ access to external finance. Complementary studies of, amongst other things, creditors’ rights and labour regulation have buttressed the core claim that different legal families have different dynamic properties. Specifically, common law systems are said to be better able to respond to the changing needs of a market economy than are civilian systems. This literature has, however, largely been based upon cross-sectional studies of the quality of various aspects of corporate and financial law at particular points in the late 1990s. Whilst some correlations between patterns of financial development and legal institutions have been established, the issue of causation remains contentious. Given this background, at least two types of study can potentially contribute to our understanding of the links between law and financial development. One approach, which focuses on outcomes, would be to investigate the links between legal rules and indicia of financial market development, and economic development more widely, over time. This would call for the construction of time series data on legal variables of interest. Quantitative methodology could be used to test the hypothesis that changes in legal rules precede financial market development (or indeed the inverse). A related approach, focusing more on mechanisms, might examine the way in which the strength of the protection of particular types of constituency changes over time. Panel data comprising some civil and some common law countries would allow for examination of whether there are systematic differences in the pattern of evolution in different legal systems. If, as posited, the mechanisms of legal evolution are significantly different in common and civil law systems, we would expect to see change occurring at different speeds, and plausibly in different directions, in systems of each variety. Conversely, we might not expect to see as much variety between members of the same legal origin as between members of different legal origins. This paper follows the second approach outlined above. Further, it uses a quantitative methodology, which may also be called ‘numerical comparative law’ or ‘leximetrics’ (Siems 2005a; Lele and Siems 2007a). We present new longitudinal indices of legal rules applicable to business enterprise—grouped