Law and finance in historical perspective: Politics, bankruptcy law, and corporate governance in Brazil, 1850--2002

Do early institutions exert a long-term impact on subsequent institutional and economic development? Do endowments and legal tradition explain the subsequent development of financial markets and rule of law? An influential stream of the economics literature explains development levels around the world using as explanatory variables institutions adopted in the distant past. In particular, the "law and finance" literature has argued that legal origin---e.g. civil and common law---determines both the extent of investor protections and the level of financial market development of a country (La Porta, Lopez de Silanes, Shleifer and Vishny, 1997, 1998, 2000). Furthermore, extensions of this literature have argued that conditions at the time of colonization, such as settler mortality, are powerful explanatory variables of financial development in ex-colonies (Beck, Demirguc-Kunt and Levine, 2003; 2003b). The empirical work of these studies has showed that being a Civil Law country is correlated with having poor protection of investors and small financial markets. This dissertation challenges these hypotheses by showing the historical variation in investor protections and equity and bond markets in Brazil---a Civil Law country. Rather than having legal origin determining these variables, I argue that the variation in financial market size responds to international capital cycles, while the variance in investor protections is better explained by the historical changes in the interests of ruling coalitions. In order to study investor protections, I created creditor and shareholder rights indices following the "law and finance" methodology and looked at their enforcement. My analysis of creditor rights and court cases shows that creditor rights in Brazil were relatively strong between 1850 and 1940. The analysis of shareholder protections and corporate ownership demonstrates that shareholder rights got stronger on paper from 1882 to 2001---with a minor setback in the 1990s, while equity ownership got increasingly more concentrated after 1940. I end by suggesting that increasing popular participation in financial markets might be a good way to commit governments to protect investors.