Investor Protection and Corporate Governance1
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny
Harvard University, Harvard University, Harvard University, and University of Chicago
First Draft, June 1999
Recent research on corporate governance has documented large differences between
countries in ownership concentration in publicly traded firms, in the breadth and depth of financial markets, and in the access of firms to external finance. We suggest that there is a common element to the explanations of these differences, namely how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, summarize the consequences of these differences, and suggest potential strategies of reform of corporate governance. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bankcentered and market-centered financial systems.