Strong Legal Protection Research Articles

Why Investor Trust (and Not the Law) Matters: Japanese Lifetime Employment's Role as a Non-Legal Mechanism for Credible Investor Trust

Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Schleifer, and Robert Vishny (the “Gang of Four”) have captivated comparative corporate law scholars with their empirical research which claims to prove that ‘law’ is the key to economic development. A foundational principle in their theory is that legal protections for investors are necessary for larger financial markets and economic growth. The Gang of Four reason that rational investors will not trust corporate management and in turn, will not invest without strong legal protections. Post-war Japan is one of the wealthiest countries in the world. For over half a century it has built and maintained one of the world’s most successful financial markets. Even after the bubble burst, empirical studies that measure the size, liquidity, depth and efficiency of Japan’s financial market consistently rank it among the ‘elites’ of the world. Based on the Gang of Four’s theory, post-war Japan must have provided vigorous legal protections for investors. In fact, the opposite is true. A hallmark of post-war Japanese corporate governance is its extremely weak investor protection. Shareholder rights have been scarcely exercised and Japan’s largest creditors often voluntarily subrogate their limited creditor rights. The obvious question that arises is: why have investors so wholeheartedly trusted management in post-war Japan? Lifetime employment provides the answer. Japan’s post-war lifetime employment system inextricably ties the financial and social future of corporate management to the success of the company. This ensures investors that management is credibly constrained from self-enrichment and motivated to maximize performance. With such an assurance, it makes rational sense for investors to invest. Importantly, law plays merely a complementary role in lifetime employment. This demonstrates that the Gang of Four’s theory — that ‘law’ is critical in the development of successful financial markets — is incorrect.

META-ANALYZING OWNERSHIP CONCENTRATION AND FIRM PERFORMANCE IN ASIA: TOWARDS A MORE FINE-GRAINED UNDERSTANDING.

We present a meta-analysis of the relationship between concentrated ownership and firm financial performance in Asia. At the cross-national level of analysis, we find a small but significant positive association between both variables. We further unpack this relationship by exploring moderating effects of owner identity and national institutions. We find that our focal relationship is stronger for foreign than for domestic owners, and that pure 'market' investors outperform 'stable' or 'inside' owners whom are often multiply tied to the firm. Regarding institutions, we find that a certain threshold level of institutional development is necessary to make concentrated ownership an effective corporate governance strategy, and that strong legal protection of shareholders makes ownership concentration inconsequential and therefore redundant. Finally, in jurisdictions where owners can easily extract private benefits from the corporations they control, the focal relationship becomes weaker, presumably on account of minority shareholder expropriation.

Stock Return, Risk, and Legal Environment Around the World

This paper investigates how the legal environment in a country influences performance and risk of stock across countries at different developmental stages and of various rules of jurisdiction. Using data of 4,916 stocks from 37 countries, our empirical findings confirm that equities in countries with English common-law origin have higher risk premiums than those in civil-law countries, particularly for countries of the French/Spanish code. The indicators representing high efficiency in law system, low corruption, strong legal protection of investors' rights, and reliable political environment are associated with low risk and high performance. The various elements of legal procedural formalism, however, have differing effects on volatility and return.

Meta-Analyzing Ownership Concentration and Firm Performance in Asia: Towards a More Fine-Grained Understanding

textabstractWe present a meta-analysis of the relationship between concentrated ownership and firm financial performance in Asia. At the cross-national level of analysis, we find a small but significant positive association between both variables. This finding suggests that in regions with less than perfect legal protection of minority shareholders, ownership concentration is an efficient corporate governance strategy. Yet, a focus on this aggregate effect alone conceals the existence of true heterogeneity in the effect size distribution. We purposefully model this heterogeneity by exploring moderating effects at the levels of owner identity and national institutions. Regarding owner identity, we find that our focal relationship is stronger for foreign than for domestic owners, and that pure market investors outperform stable or inside owners whom are multiply tied to the firm. Regarding institutions, we find that a certain threshold level of institutional development is necessary to make concentrated ownership an effective corporate governance strategy. Yet we also find that strong legal protection of shareholders makes ownership concentration inconsequential and therefore redundant. Finally, in jurisdictions where owners can easily extract private benefits from the corporations they control, the focal relationship becomes weaker, presumably due to minority shareholder expropriation.

The Determinants of Corporate Cash Management Policy: Evidence from Around the World

We examine the determinants of corporate cash management policy across a broad sample of international firms. We find that firms in countries with strong legal protection of minority investors are more likely to decrease (increase) their cash holdings in response to an increase in cash flow (stock price) than are firms in countries with weak legal protection. In addition, financially constrained firms display higher sensitivities of cash to both cash flow and stock prices than do financially unconstrained firms. The results are robust to alternative specifications. Our findings highlight the importance of both country-level institutional factors and firm-level financial constraints in managers' corporate cash management policies.

Foreign entry and bank competition

Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: The entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large firms thereby neglecting small and medium enterprises. The results also explain why this observed bias is stronger in emerging markets.

Minority shareholder rights under Russian law

While Russian law provides strong legal protection for minority shareholders, individual shareholders will not benefit from these provisions without a ‘hands-on’ policy with respect to their direct investments in Russia. Minority shareholders must proactively pursue their rights and insist upon compliance with the technical provisions of Russian law. This article describes and analyses such key provisions, assesses the extent of shareholder protection under Russian law and describes areas where abuse has shown the need for improvement.

Foreign Entry and Bank Competition

Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large firms thereby neglecting small and medium enterprises. The results also explain why this observed bias is stronger in emerging markets.

Legal Environment, Firm-level Corporate Governance and Expropriation of Minority Shareholders in Asia

Claessens, Djankov, and Lang (2000) show that corporate control is substantially enhanced by using pyramid structures and cross-holdings by firms in nine East Asian countries. Claessens, Djankov, Fan, and Lang (1999) (CDFL) provide empirical evidence regarding expropriation arising from the separation of cash flow from voting rights in Asian firms. Their analysis suggests a high degree of expropriation in Indonesia, Philippines and Thailand. We re-examine the problem of expropriation in Asian firms reported by earlier research. We explore firm-level governance-control structure interactions, and control-legal environment interaction for a set of Asian firms for which we are able to obtain relevant data for all the required variables. The major contribution of this paper is that it jointly examines ownership-control structure, firm-level governance and country-level legal protection available to external suppliers of capital. Using post-crisis data, we find a strong country effect in governance. In general, high control firms in countries with weak legal protection have lower firm-level governance scores in general. On the other hand, high control firms, in countries which have a stronger legal protection environment, signal their intention to not expropriate minority shareholders' wealth by voluntarily adopting measures to strengthen their discipline and responsibility scores. Contrary to earlier findings, we do not find a relationship between control-ownership wedge and firm value. Furthermore, we do not find any relation between firm-level governance and firm value as measured by Tobin's Q.

State of the Union: A Century of American Labor

State of Union: A Century of American Labor. By Nelson Lichtenstein. (Princeton: Princeton University Press, 2002. Pp. ix, 337. Preface, acknowledgments, introduction, notes, index. $29.95.) Nelson Lichtenstein's latest book is both a history of American labor movement over past seventy years and a plea for its revival. Lichtenstein, who teaches in history department at University of California at Santa Barbara, is probably leading New Left historian studying American labor since 1930s. State of Union is a work of synthesis that is most interesting for what it says about how New Left scholarship on American labor has evolved over past three decades. Lichtenstein makes clear in his book's introduction that, rather than a history of American workers in general, he has written a study of labor unions and their relationship to what reformers used to call the labor question. State of Union s first two chapters trace upsurge in American unions during Great Depression and World War II. Lichtenstein explains very clearly various rationales New Dealers developed to support expansion of trade unionism, such as need to increase consumer purchasing power, promote employment (and thus economic) security, and provide a measure of democracy in modern workplace. This was logic behind creation of National Labor Relations (Wagner) Act of 1935, which gave American unions strong legal protections for first time. Unlike other New Left scholars, such as Thomas Ferguson and Colin Gordon, Lichtenstein gives most of credit for Wagner Act's passage to New Deal liberals and more radical leftists, not enlightened employers and financiers. Lichtenstein is quick to point out that worker militancy, not laws, were most important reason why unions grew during mid-1930s. His account differs somewhat from older ones by emphasizing that split between American Federation of Labor (AFL) and Congress of Industrial Organizations (CIO) grew out of differing attitudes toward new immigrants from southern and eastern Europe, and not just question of craft versus industrial organization. The CIO's leaders and organizers were more open to recruiting members from recently arrived immigrant groups, Lichtenstein argues, than trade unionists of northern European ancestry who dominated AFL. Lichtenstein's account of labor's rise also differs from New Left orthodoxy by recognizing important contributions made by Democratic governors in major industrial states and Roosevelt administration. …

The Future of Technology Transfer in the Global Village

The history of International Law has been a struggle to develop a set of legal institutions that transcend national borders. The need for strong supranational legal protection has never been as evident as it is in the present. It is undeniable that our world is going through a process of globalisation, in which culture and consumption patterns are shared throughout the Four Corners of the world. Part of this process has been sped up by multinational corporations, a group of enterprises whose great influence is felt around the globe.

The Utility of a Written Constitution: Free Exercise of Religion in Israel and the United States

The Utility of a Written Constitution 35 THE UTILITY OF A WRITTEN CONSTITUTION: FREE EXERCISE OF RELIGION IN ISRAEL AND THE UNITED STATES by Martin Edelman Martin Edelman is a Professor (and chair) of the Political Science Department at the Rockefeller College of Public Affairs and Policy of the University at Albany. He is the author of Democratic Theories and tbe Constitution and of many articles dealing with American constitutional law and Israel's court systems. In 1987, while at Peking University, Professor Edelman taught the first course on Israeli politics in the People's Republic of China. He has also been a visiting professor at the University of liverpool and Tel Aviv University. Professor Edelman is currently the President/Convenor of the Research Committee on Comparative Judicial Studies of the International Political Science Association. Public policy is all too frequently debated and resolved in the total absence ofempirical evidence. Judicial policy-making is rarely an exception to this social science truism. Even "analyses" of such vital matters as human rights proceed on the basis of unexamined ideological premises. Take, for example, the utility of a written constitution to protect the rights of minority religious sects against the hostility and/or indifference of the majority. In the United States it is universally assumed, by judges and commentators alike, that the First Amendment's Free Exercise Clause provides that essential protection. Yet historically the religious liberty of minority sects has not always been legally protected; it may not even be true in the democratic, pluralistic, tolerant, and enlightened America of the 1990s. By way of contrast, the Jewish State of Israel, without a written constitution, provides strong legal protections for minority religious sects. 36 SHOFAR Summer 1993 Vol. 11, No.4 By contrasting the experience of religious minorities in Israel and in the United States, this paper seeks once again to reopen the question of the utility of written constitutions in democratic societies. I. In the United States all discussions of public policies concerning religion have automatically involved the Constitution. For in a very real sense, the Constitution of 1787 created the American polity and has helped to mold its political culture.1 The Constitution was expected to be the measure of legitimacy for all governmental acts. But it was expected to do more. A written constitution was to perform an architectonic function: it was to shape and direct the government and thereby the entire polity. To quote James Wilson, a prominent player at the Constitutional Convention, "by the invigorating and overruling energy of a constitution, the force and direction of the government are preserved and regulated; and its movements are rendered uniform, strong, and safe.,,2 The product of human reason, an artifice, was to mold American society. In large measure, the expectations of the founding generation have been fulfilled. In the United States, political debate and judicial interpretation of the Constitution are closely intertwined. As Alexis de Tocqueville noted a century and a half ago, "Scarcely any political question arises in the United States that is not resolved, sooner or later, into a judicial question. Hence all parties are obliged to borrow, in their daily controversies , the ideas and even the language, peculiar to judicial proceedings."3 Nowhere is this more true than on issues involving religion and the state. The framers of the First Amendment to the Constitution plainly intended to constitutionalize the relationship of the national government to religion: "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; ..." In the United States, by design and long accepted political tradition, it is impossible to disentangle public policy toward religion and religious practices from constitutional interpretation. IS. Levinson, Constitutional Faith (1988); Edelman, "The Constitution and the American Nation," in A. Gutfeld, ed., The American Nation (1986), pp. 9-23 (in Hebrew). 2J. Andrews, ed., The Works ojJarnes Wilson (1896), p. 374. The same idea is expressed by Thomas Paine in The Rights ofMan (Dolphin ed., 1961), pp. 420-445, and by Alexander Hamilton in The Federalist (#81). 31 Democracy in America (Vintage ed., 1960), p. 290. The Utility of a Written Constitution 37 But crafting the appropriate constitutional limitations on public policies...

Conservation Prospects for Musk Deer and Other Wildlife in Southern Qinghai, China

Musk deer in China, although provided with strong legal protection, are subject to varying levels of exploitation depending on the de facto conservation system operating in each locale. In southern Qinghai Province's Baizha Forest, musk deer have declined in most areas, due primarily to snaring by non-local people. However, musk deer, as well as blue sheep and white-lipped deer populations, in close proximity to Tibetan Buddhist monasteries and some villages are afforded protection from most poaching activities, although they still suffer incremental loss of habitat as human and livestock populations increase. An intermediate situation exists near a government-operated forestry guard station, where poaching by outsiders is deterred, but the guards themselves kill some wildlife. The existence of differing protection levels within an area where all wildlife exploitation is nominally proscribed suggests that local cultural practice and economic contingencies are more important than legal sanctions alone.

The Scope of Copyright Protection for Computer Programs

The computer industry has been extremely active in its pursuit of strong legal protection for computer programs and has secured changes to copyright law on an impressive international scale. Copyright law has been the vehicle by which the legal protection of computer programs against unauthorised copying has been afforded and, generally, computer programs are protected as literary works. Although computers have been around since the 1940s, the need for protection against copying computer programs did not arise until the wide-scale spread of computers associated with the development of mini-computers and, especially, micro-computers. ' Internationally, changes to copyright law to accommodate computer programs have been spread over a number of years and there remain many countries that have yet to take action. The United States of America was first with amending legislation in 1980 followed by Australia in 1984 and Japan, the Federal Republic of Germany, France and the United Kingdom in 1985. Other countries followed whilst others, such as the Netherlands, perceived their existing law to be satisfactory on this count and others commissioned preliminary studies.2 Arguments for strong protection of computer programs appear at f1rst sight to be reasonable, especially considering the desirability of attracting investment and stimulating innovation in new technology. However, the computer industry is now split over issues relating to the scope of protection, for example, whether basic ideas and algorithms should be protected and the advisabilit of permitting reverse analysis of computer programs to assist in the development of inter-operable systems which will interface with or replace existing computer programs. The European Commission is presently grappling with these issues in its attempt to product a directive aimed at harmonising the legal protection of computer programs within the European Communities.3 In the United Kingdom, computer programs are protected by copyright as literary works by subsection 3(1)(b) of the Copyright, Designs and Patents Act 1988.4 By section I of the Act, copyright subsists in a computer program if it is original and

Recovery of the whooping crane Grus americana

Officially listed as ‘endangered’, the whooping crane Grus americana currently receives strong legal protection under the Endangered Species Act of 1973. To remove it from endangered status, the official Whooping Crane Recovery Plan requires 40 nesting pairs in the main population which migrates from Wood Buffalo National Park, NWT, Canada to the Aransas National Wildlife refuge on the Texas gulf coast. Two demographic models of the migratory population indicate that this criterion for recovery is likely to be met within the next decade.