How do we measure shareholder protection? For more than ten years, the Centre of Business Research (CBR) at the University of Cambridge has developed datasets on shareholder, creditor and worker protection (available here). These datasets have been used in many papers, with a recent paper by Deakin, Sarkar, and Siems (2018) also discussed on the OBLB in January 2018.
Our recent paper entitled Shareholder Protection, Stock Markets and Cross-Border Mergers (available as a CBR working paper; and journal publication forthcoming in October 2018) is based on the CBR shareholder protection data available for 30 countries over the period 1990-2013. It is the first one that uses a panel data of different types of shareholder protection in order to examine (i) the effect of such laws on stock market development and (ii) the convergence of shareholder protection laws through cross-border mergers and acquisitions.
In detail, first, our research picks up from previous findings (Katelouzou and Siems 2015) that there has been a more pronounced rise in ‘paternalistic’ than in ‘enabling’ rules on shareholder protection across countries (referring to the substantive direction of forms of shareholder protection, not the formal difference between default and mandatory rules). It econometrically assesses the possible relevance of these two types of rules. The paper finds that enabling rules of shareholder protection improve stock market development; yet, no such significant relationship is found for paternalistic rules of shareholder protection.
Second, we examine the convergence of shareholder protection laws through cross-border mergers and acquisitions. We find that cross-border mergers and acquisitions positively influence shareholder protection. The coefficient on cross-border mergers and acquisitions for enabling (but not paternalistic) rules of shareholder protection increases in magnitude and significance under certain conditions. The positive relationship confirms our hypothesis on convergence by law through convergence by contract. The result also indicates that the initial level of shareholder protection is significant through its interaction with cross-border mergers.
Our findings shed new light on the law and finance relationship as well as on the issue of international and club convergence in shareholder protection. Using a panel data for 30 countries over the period 1990-2013, shareholder protection is found to be significant for both questions. However, the distinction between enabling and paternalistic rules then shows that this is mainly due to the enabling rules of shareholder protection. This finding is remarkable as lawmakers have focussed more on increasing paternalistic rules; it also follows that the existing literature misses this core distinction in the relationship between law and finance.
Frederick S. Ahiabor is a Doctoral Researcher in Economics at the School of Business and Economics, Loughborough University
Gregory A. James a Reader in Banking and Finance at Leicester Castle Business School, De Montfort University
Frank O. Kwabi is a Lecturer in Accounting and Finance at Leicester Castle Business School, De Montfort University
Mathias M. Siems is a Professor of Commercial Law at Durham Law School, Durham University