Legal Protection Of Minority Shareholders And Stock Market Development

Both academic and practical researches show that financial systems do exert a casual impact on long-run economic growth. However, which facts determine the financial development? Law and finance theory, which developed in 1990s, have argued that cross-country differences in legal environment play a key role in determining cross-country differences in financial development.This paper absorbs the previous research outcomes in law and finance field. We study the empirical relationship between legal environment and financial development in China.First, we introduce the important research outcomes in law and finance study and show the effect of legal environment on financial development. Legal families affect the level of investor protection which in turn is linked to the cross-country differences in financial development. Second, we present a measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. The index is calculated based on legal rules covering self-dealings from 1997 to 2006. We study the long-run relationship between legal protection of minority shareholders and development of stock market.The data indicate that legal protection of minority shareholders predicts a variety of stock market outcomes. An effective strategy of regulating large self-dealing transactions benefits stock market development. The results are consistent with the law and finance theory, and present some suggestions on the Chinese legal system reform.