Aims & objectives
The aim of this project was to analyse to what extent the quality of legal and other formal institutions has affected financial development and economic growth in the BRIC countries, and whether reliance on informal institutions poses an obstacle to their future growth. The project involved collaboration between the CBR and a number of partner institutions, and was supported by the law firm Clifford Chance. In 2016-2017 further funding was obtained via the ERSC Rising Powers and Interdependent Futures research programme to support a number of dissemination activities.
For over a decade, with the encouragement of the World Bank and western governments, developing countries have adopted programmes of legal and financial reform combining privatisation of state-owned banks and enterprises with the enactment of enhanced legal protections for shareholders and creditors. According to some accounts, China’s recent experience demonstrates the value of a developing legal framework in overcoming limits to growth in an informal, trust-based economy, while Russia is actively seeking to put in place the necessary legal and regulatory structures for market-based financial development. In Brazil, the example of the Novo Mercado, a new stock market segment which has attracted a large number of high-tech IPOs, suggests that a strategy of allowing firms to opt into a shareholder-rights based regulatory regime can work in promoting flows of equity finance in an emerging market context. In India, too, there is some evidence that recent corporate governance reforms have led to greater transparency on the part of listed firms and to increased investor confidence, although critics of the reform process argue that it has not gone far enough. The picture emerging from these experiences is one in which formal and informal institutions do not necessarily operate in tension. Rather, they may complement each other in providing the foundations for sustainable economic growth and societal development.
The project adopted an inter-disciplinary, multi-methods approach, combining quantitative analysis of the extent and nature of correlations between legal and financial development in the countries under review, with qualitative, fieldwork-based research aimed at building up a detailed, micro-institutional account of the perceptions and strategies of actors involved in legal and financial reforms. We used legal and financial datasets to carry out time-series and panel data analysis capable of specifying causal links between legal institutions and economic development in the rising powers and, by way of comparison, in a wider sample of developed and developing countries with over 30 annual observations per country. The fieldwork focused on the role played in each country by the banking sector and capital markets as alternative (or possibly complementary) sources of finance for firms; on how government reconciles or combines its continuing role as owner of financial and industrial enterprise with its emerging role as regulator of banks and securities markets; and on how firms meet their financing needs.
Results and dissemination
We constructed new indices of shareholder rights and creditor rights in 30 countries over the period 1990-2013. These new datasets enabled us to measure the global diffusion of laws for the protection of investors and creditors, and to estimate their effects on stock market and credit market development. While the impact of legal convergence was mediated by country-specific effects including local laws and institutions, we did observe some common trends. A key finding is that the strengthening of shareholder rights is associated with a rise in equity values and with with increases in stock trading but not in the number of listed companies. Thus a provisional conclusion is that enacting shareholder rights may not be enough on its own to create deeper and more liquid capital markets in developing economies.
We supplemented our econometric work with fieldwork in the four BRIC countries. Each country has a distinct experience but again there are some common trends.
In China our fieldwork led us to be sceptical of the claim that China’s recent economic growth is mainly the result of guanxi or interpersonal trust coupled with strong direction from central government. Instead we find increasingly sophisticated use of contracts and growing demand for the rule of law. There is less reliance on guanxi in product markets, in particular in the more economically advanced regions and in developing sectors such as IT.
However, the move towards market-based transacting and transparent pricing is less evident in the case of Chinese financial markets. Chinese stock markets are not regarded as transparent and are dominated by state-owned enterprises. They do not yet provide a reliable source of equity finance for private-sector firms. Start-ups in sectors such as IT tend to rely on family members and angel investors for funding, rather than venture capital or IPOs. However, some of our interviewees expected Chinese stock markets to become more transparent over time.
In Russia we observed a somewhat different picture: there is pent-up demand for the rule of law but less confidence in the legal system, a stronger perception of judicial corruption, and more concern over a ‘predatory’ state, than in China. At the same time there has been a discernible change in the business environment in Russia since the turbulence of the 1990s. Medium-sized businesses can generally operate successfully as long as they stay ‘below the radar’ of state officials.
A theme emerging from the Russian research is that western laws and practices cannot be simply imposed in the transition to a market economy. Entrepreneurial freedom and a reduced role for the state do not automatically translate into economic development, but may create the conditions for opportunism and abuse of power. The absence of democratic institutions may undermine otherwise sophisticated market-orientated laws.
The experiences of Brazil and India, both democracies, make for a relevant contrast. In both cases we observe positive effects of legal and corporate governance reforms aimed at promoting transparency in stock markets and encouraging bank-based lending to private sector firms. At the same time, larger enterprises play an important role in the stock market and in the economy as a whole, and convergence on a western model of deep and liquid capital markets is a gradual process.
Chen, D., Deakin, S., Siems, M and Wang, B. (2017) ‘Law, Trust and Institutional Change in China: Evidence from Qualitative Fieldwork’, Journal of Corporate Law Studies. Early view available.
Deakin, S. (2017) ‘Tony Lawson’s theory of the corporation: towards a social ontology of law’ Cambridge Journal of Economics, forthcoming.
Deakin, S., Mollica, V. and Sarkar, P. (2016) ‘Varieties of creditor protection: insolvency law reform and credit expansion in developed market economies’ Socio-Economic Review, doi:10.1093/ser/mww005
Deakin, S., Gindis, D., Hodgson, G., Huang, K. and Pistor, K. (2016) ‘Legal institutionalism: capitalism and the constitutive role of law’ Journal of Comparative Economics, dx.doi.org/10.1016/j.jce.2016.04.005
Hamilton, J. and Deakin, S. (2015) ‘Russia’s legal transitions: Marxist theory, neoclassical economics, and the rule of law’ Hague Journal of the Rule of Law, 7: 283-307.
Katelouzou, D., and Siems, M. (2015) ‘Disappearing paradigms in shareholder protection: leximetric evidence for 30 Countries, 1990-2013’ Journal of Corporate Law Studies, 15: 127-160.
Chen, D., and Deakin, S. (2014) ‘On heaven’s lathe: state, rule of law, and economic development’ Law and Development Review, 8: 123-45.
Deakin, S., Gindis, D., Hodgson, G., Huang, K. and Pistor, K. (2015) ‘Legal institutionalism: capitalism and the constitutive role of law’ forthcoming, Journal of Comparative Economics.
Deakin, S., and Hamilton, J. (2015) ‘Russia’s legal transitions: Marxist theory, neoclassical economics, and the rule of law’ forthcoming, Hague Journal of the Rule of Law.
Siems, M. (2016) ‘Measuring law: picking the least worst option’ Socio-Economic Review, 14: forthcoming.
Fennel, S., Amandeep, K. and Singh, A. (2013) “India and the Eurozone: a commentary on the political economy of adjustment and correction.” Contributions to Political Economy, 32: 151-167.
Sheng, A. and Singh, A. (2012) ‘The challenge of Islamic finance’, Financial Times Deutschland published in German 17 April 2012, and also published in English in Project Syndicate, 16th April 2012. Subsequent to its publication in the latter, the article has been widely reproduced in newspapers and financial journals worldwide, including leading French and Dutch newspapers.
Armour, J., and Schmidt, C. (2016) ‘Layers of legality: building enforcement capacity for Brazilian corporate and securities Law’, forthcoming in R. Huang and N. Howson (eds), Public and Private Enforcement of Company Law and Securities Regulation—China and the World.
Adams, Z., and Deakin, S. (2015) ‘Quantitative labour law’, in A. Ludlow and A. Blackham (eds.) New Frontiers in Empirical Labour Law Research (Oxford: Hart).
Armour, J. Menezes, A., Uttamchandani ,M. and van Zwieten, K. (2015)‘How creditor rights matter for debt finance: a review of empirical evidence’, in F. Dahan (ed), Research Handbook on Secured Financing in Commercial Transactions (Cheltenham: Edward Elgar, 2015), 3-25.
Armour, J., and Schmidt, C. (2015) ‘Layers of legality: building enforcement capacity for Brazilian corporate law’, in L. Scaffardini (ed.), The Brics Group in the Spotlight: An Interdisciplinary Approach, (Edizioni Scientifiche Italiane: Parma), 135-174.
Deakin, S. (2015) ‘Law as evolution, evolution as social order: common law method reconsidered’, in S. Grundmann and J. Thiessen (eds.) Law in the Context of Disciplines (Tübingen: Mohr Siebeck).
Deakin, S. (2015) ‘The evolution of theory and method in law and finance’, in E. Ferran, N. Maloney and J. Payne (eds.) The Oxford Handbook of Financial Regulation (Oxford: OUP).
Deakin, S. and Adams, Z. (2015) ‘Corporate governance and employee relations’, in J. Gordon and W.-G. Ringe (eds.), The Oxford Handbook of Corporate Law and Governance (Oxford: OUP) forthcoming.
Siems, M ‘The leximetric research on shareholder protection’ (2015) in J. Hill and Rl Thomas (eds.), Research Handbook on Shareholder Power (Cheltenham: Edward Elgar), 168-185.
Armour, J. and C Schmidt, ‘In the Shadow of Inflation: Corporate Law and Finance in Brazil’, working paper, University of Oxford Faculty of Law (2015).
Sheng, A. and Singh A. (2013) ‘Islamic finance: conceptual and analytical issues from the perspective of conventional economics’, in Z. Iqbal and A. Mirakhor (eds.) Essays on Islamic Finance and Economic Development (Washington DC: World Bank).
Sheng, A. and Singh, A. (2013) ‘Enhancing Islamic finance: establishing an Islamic stock market that overcomes problems of the existing stock market regime’, in Z. Iqbal and A. Mirakhor (eds.) Essays on Islamic Finance and Economic Development (Washington DC: World Bank).
Singh, A. and Zammit, A. (2012) ‘Globalisation, Labour Standards and Economic Development, in J. Michie (ed.) The Handbook of Globalisation (2nd. ed.), pp. 230-256 (Cheltenham: Edward Elgar).
Singh, A. (2012) ‘Addendum’ in I. Ahluwalia and I. Little (eds.) India’s Economic Reforms and Development: Essays for Manmohan Singh (Oxford: OUP).
Singh, A. (2013) ‘The economic and financial crisis of 2008-2010: the international dimension’, in G. Epstein and M. Wolfson (eds.) Oxford Handbook of the Political Economy of Financial Crisis (Oxford: OUP).
Chen, D., Deakin, S., Siems, M. and Wang, B. (2017) ‘Law, trust and institutional change in China: evidence from qualitative fieldwork’ CBR WP No. 485, December 2016; University of Cambridge Faculty of Law Research Paper No. 15/2017.
Deakin, S. (2017) ‘Tony Lawson’s theory of the corporation: towards a social ontology of law’ CBR WP No. 491, June 2017.
Wang, B. (2017) ‘Ownership, institutions and firm value: cross-provincial evidence from China’ CBR WP No. 484, December 2016.
Deakin, S, Mollica, V and Sarkar, P. ‘Varieties of Creditor Protection: Insolvency Law Reform & Credit Expansion in Developed Market Economies‘
Deakin, S., Gindis, D., Hodgson, G., Huang, K. and Pistor, K. (2015) ‘Legal institutionalism: capitalism and the constitutive role of law’ CBR Working Paper No. 468, March 2015.
Hamilton, J. and Deakin S. (2015) ‘Russia’s legal transitions: Marxist theory, neoclassical economics, and the rule of law’ CBR Working Paper No. 471, June 2015.
Katelouzou, D., and Siems, M. (2015) ‘Disappearing paradigms in shareholder protection: leximetric evidence for 30 Countries, 1990-2013’ CBR Working Paper No. 467, March 2015.
van Zwieten Kristin, working paper on debt finance and corporate debt restructuring in India, forthcoming
Chen, D., and Deakin, S. (2014) ‘On heaven’s lathe: state, rule of law, and economic development’ CBR Working Paper No. 464, September 2014.
Wang, B. (2014) ‘Corporate governance, institutional factors and firm performance: cross-provincial evidence of Chinese firms during the financial crisis’, working paper in progress.
Borodina, S., Chen, D., Deakin, S., Hamilton, J., and Wang, B. (2017) ‘The rule of law and socio-economic development in Russia and China’ paper presented to the conference, From Rising Powers to Interdependent Futures, Final Conference of the ESRC Rising Powers and Interdependent Futures Research Programme, University of Manchester, 21-23 June.
Deakin, S., Siems, M. and Sarkar, P. (2016) ‘Is there a relationship between shareholder protection and stock market performance?’ , presented to the Journal of Law, Finance and Accounting Annual Conference, Northwestern University, Chicago, 16-17 November 2016, and the Goethe-Penn Conference on Law and Finance, University of Frankfurt, 16-17 December 2016.
Armour, J., Borodina, S., Deakin, and Hamilton, J. (2016) Seminar at Clifford Chance, London ‘Empowering Financial Institutions in the Emerging Markets’.
Chai, D. and Buchanan, J. workshop at Japan Corporate Governance Network, September 2016.
Chai, D. ‘Corporate Governance, Legal Origin and the Persistence of Profits’, Annual Conference of the European Association of Law and Economics, Bologna, September 2016.
Chai, D. ‘Does hedge fund activism change corporate governance? Evidence from Japan’ Society of the Advancement of Socio-Economics (SASE) Annual Conference, Berkeley, June 2016.
Chen, D., Deakin, S., and Wang, B., ‘Law, trust and institutional change in China: evidence from qualitative fieldwork’ presented to the CASS seminar on the rule of law, Beijing, December 2015.
Armour, J., ‘How Creditor Rights Matter for Debt Finance: A Review of Empirical Evidence’, EBRD Conference on Secured Lending in Commercial Transactions—Trends and Perspectives, EBRD, London, November 2013.
Armour, J., ‘Prioritizing the Implementation of International Financial Regulation’, at Commonwealth Central Bank Governors Annual Meeting, Washington, DC, October 2014.
Armour, J. and C Schmidt, ‘Layers of Legality: Building Enforcement Capacity for Brazilian Corporate and Securities Law’ at conference on The BRICS Group in the Spotlight: An Interdisciplinary Approach (University of Parma, November 2014)
Armour, J. and C Schmidt, ‘Layers of Legality: Building Enforcement Capacity for Brazilian Corporate and Securities Law’ at workshop on Law and Finance in Rising Powers in Cambridge, December 2014.
Armour, J., ‘Layers of Legality: Building Enforcement Capacity for Brazilian Corporate and Securities Law’ at conference on Public and Private Enforcement of Company Law and Securities Regulation—China and the World at the Chinese University of Hong Kong (co-organised with the University of Michigan Law School), December 2014.
Borodina, S., Deakin, S. and Hamilton, J. (2014) ‘Law and finance in Russia’, Workshop on Law and Finance in Rising Powers, Cambridge, December 2014.
Chen, D., and Deakin, S. (2014) ‘On heaven’s lathe: state, rule of law, and economic development’, Conference on the Rule of Law, Chinese Academy of Social Sciences, Beijing, December 2014.
Chen, D. and Siems, M. (2015) ‘Different legal institutions for different economic settings: evidence from interviews in China’, presented to conference on New Directions for Law and Development Studies, New Orleans, April 2015.
Deakin, S. (2015) ‘Evolution of the corporate form: from shareholders’ property to the corporation as commons’, presentation to WINIR Symposium, Lugano, March 2015.
Deakin, S., and Hamilton, J. (2015) ‘The role of law in economic development in China and Russia’, presentation to Clifford Chance ‘Thought Leadership’ workshop, London, May 2015.
James, G., and Siems, M. (2014) ‘First results from the Extended Shareholder Protection Index’ Workshop on Law and Finance in Rising Powers, Cambridge, December 2014.
Siems, M ‘Different Legal Institutions for Different Economic Settings: Evidence from Interviews in China’ at: Annual Conference of the World Interdisciplinary Network for Institutional Research (WINIR), Rio de Janeiro, Brazil (9/15)
Siems, M Conference on ‘New Directions for Law and Development Studies’, New Orleans, US (4/15)
Siems, M ‘Disappearing Paradigms in Shareholder Protection: Leximetric Evidence for 30 Countries, 1990-2013’ at: Annual Conference of the Society for the Advancement of Socio-Economics (SASE), London, UK (7/15)
Siems, M Corporate Governance Workshop, University of Hertfordshire, UK (6/15)
Wang, B. (2014) ‘Corporate governance, institutional factors and firm performance: cross-provincial evidence of Chinese firms during the financial crisis’ Workshop on Law and Finance in Rising Powers, Cambridge, December 2014.
Siems, M Workshop on ‘Law and Finance in Rising Powers’, University of Cambridge, UK (12/14)
Deakin, S., and Hamilton, J. (2015) ‘The role of law in economic development in China and Russia’, Clifford Change Thought Leadership Academic Series, 2015.
Deakin, S. and Hamilton, J. (2015) ‘What role does law have to play in the economic development of the BRIC countries?’ Clifford Change Thought Leadership Academic Series, 2015.
Siems, M. research on law and finance in China discussed on two blogs:
‘Law, Trust and Institutional Change in China: Evidence from Qualitative Fieldwork‘, Oxford Business Law Blog.
‘Law, Trust and Institutional Change in China: Evidence from Qualitative Fieldwork‘, Siems, M. Blog of the British Association of Comparative Law.