6. Law & Finance

Question 1

Better financial development implies that:

Answer 1

1. Firms have larger amount of credit available
2. There is more information available about borrowers
3. Better Corporate Governance and less ‘stealing’ by the borrower
4. Higher efficiency of human capital

Question 2

Financial development can be created by different causes:

Answer 2

• Legal system
• Social norms
• Trust
• Quality of information intermediaries
• Tax system
• Deep causes: historical, political and cultural

Question 3

Three main thoughts whether finance came first or law came first

Answer 3

1. Law first, finance follows
2. Finance first, law follows
3. Law and finance are equally important

Question 4

Law first, finance follows: paper of La Porta

Answer 4

• Strong investor protection leads to deeper financial markets and better financing terms for firms
• Law sets the basics where finance is built on

Question 5

Finance first, law follows: paper of Franks

Answer 5

• UK: investor protection had little impact on the dispersion of ownership
• when there was no investor protection law: high rate of ownership dispersion
• Ownership dispersion relied more on informal relations of trust than on investor protection

Question 6

Law and Finance are equally important

Answer 6

• Settings of law and finance today are based on the traditions of colonialization
• Two main colonial traditions
• Countries, where the likelihood of getting sick was high have on average a lower GDP and less efficient finance/law
• Countries where the likelihood of getting sick was low have on average a higher GDP and more efficient finance/law

Question 7

Common law

Answer 7

each decision of a judge sets a precedent that other judges need to follow

Question 8

Civil law

Answer 8

• Based on a Code

- Divided into German, French or Scandinavian law

Question 9

Paper examines legal rules covering investor protection of corporate shareholders and creditors - La Porta

Which countries tend to do better both in protecting investors/shareholders and creditors?

Answer 9

Common law countries

Question 10

Paper examines legal rules covering investor protection of corporate shareholders and creditors - La Porta

In French and German origins countries ..

Answer 10

• Judicial system less efficient

- More corruption

Question 11

Paper examines legal rules covering investor protection of corporate shareholders and creditors - La Porta

Countries with poor investor protections indeed have ..

Answer 11

Significantly smaller debt and equity markets

Question 12

Paper examines legal rules covering investor protection of corporate shareholders and creditors - La Porta

Poor investor protection reduces ..

Answer 12

The willingness to be a minority shareholder, because there is a higher risk

Question 13

Paper examines legal rules covering investor protection of corporate shareholders and creditors - La Porta

As a response to poor investor protection ..

Answer 13

In the whole world there is a very high ownership concentration

Question 14

This paper investigates the value of private benefits of control - Dyck and Zingales

The private benefits of control are measured by two methods:

Answer 14

1. Control premium: price paid by the buyer of the shares minus the common share price on the next trading day
2. Voting premium: price of shares with voting-rights minus price of shares without voting-rights

Question 15

This paper investigates the value of private benefits of control - Dyck and Zingales

In companies with high private benefits of control ..

Answer 15

Companies are reluctant to take firms public, because there is a possibility that someone else takes control of the firm and uses it for their own private benefits

Question 16

This paper investigates the value of private benefits of control - Dyck and Zingales

Because firms are less likely to take firms public:

Answer 16

• Equity markets will be underdeveloped (fewer IPO’s and number of listed firms)
• There will be high ownership concentration
• Governments will be more likely to sell companies through assets than through share offerings (IPO)

Question 17

This paper investigates the value of private benefits of control - Dyck and Zingales

Other factors that could lead to lower private benefits of control:

Answer 17

• Market competition: when competition is high, private benefits would lead faster to bankruptcy and therefore, private benefits of control will be lower
• More media: countries where the media is more free, private benefits would be lower
• Social norms (measured as violent crimes)
• Labor as monitor
• The state as monitor