Legal origin, financial development, and innovation: evidence from large public and private firms in the U.S. and Europe

Abstract

This paper investigates the interplay between legal origin, financial market development, and the growth and innovation patterns of the population of large firms in U.S. and Europe. We document that common law countries (namely U.S., U.K., and Ireland) are characterized by a higher degree of stock market development and an increased propensity of firms to be publicly traded relative to Continental Europe. We also find that firms based in common law countries are more innovative, consistent with the view that market-based systems are more capable of financing intangible assets than bank-based systems. Also, these systems are effective at accelerating firm growth, as large firms in common law countries are sensibly younger and went public earlier than their Continental European peers, and this is particularly true for innovative firms.