Interactions of Legislative Environment, Ownership Structures and Control Rights: A Review of Literature

Meltem Gurunlu

doi:10.5539/jpl.v4np94

Abstract

The legislative environment prevailing in an economy can be an important determinant of how the firms are governed and the extent to which minority shareholders and other stakeholders are protected. The results of empirical literature on legislative environment as an external corporate governance mechanism indicate that legal and regulatory mechanisms are fundamental determinants in the evolution of corporate governance structures (LaPorta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 1999, 2000 and 2002). In an ideal corporate governance model, one share is equal to one vote which means that cash flow right (ownership right) is equal to the control right (voting right). In reality, trade offs exist between ownership and control rights in every system no matter what the country’s corporate governance system is classified as: - an outsider (dispersed ownership structure) or insider (concentrated ownership structure) -.This paper aims to investigate the comprehensive literature on investors protection topic and taxonomy of different corporate governance systems of countries from various legal origins. In this context, this paper analyzes different mechanisms to concentrate or diffuse control rights with reference to Turkish Commercial Code and Capital Market Laws.

Highlights

Legal Approach to corporate governance contends that the legislative environment in an economy is an important determinant of the way the firms are governed and is a sign of how effectively the minority shareholders and other stakeholders are protected
The comprehensive literature provided by LaPorta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 1999, 2000 and 2002) asserts that legal protection is a critical factor which may reduce the expropriation by the agents and documents significant differences in the levels of investor protection, ownership concentration, dividend policies, creditor rights and enforcement abilities among various legal systems
The level of ownership concentration is negatively related to the degree of investor protection

Summary

Introduction

Legal Approach to corporate governance contends that the legislative environment in an economy is an important determinant of the way the firms are governed and is a sign of how effectively the minority shareholders and other stakeholders are protected. The comprehensive literature provided by LaPorta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 1999, 2000 and 2002) asserts that legal protection is a critical factor which may reduce the expropriation by the agents (owner-manager) and documents significant differences in the levels of investor protection, ownership concentration, dividend policies, creditor rights and enforcement abilities among various legal systems Their findings can be summarized as follows: Common law countries provide better protection to minority shareholders and have firms which are valued more, Enforcement is best among Scandinavian legal origin countries, Creditor rights are best protected among common law countries, The level of ownership concentration is negatively related to the degree of investor protection. German civil law ( Germany, Austria, Japan, Switzerland, South Korea, Taiwan, etc)

The Effects of Legal Systems on Corporate Governance Structures

Findings

Conclusion