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so we all know that financial markets
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and in particular equity markets don't
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develop every way in the world to the
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same extent we know that the US or the
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UK have very large equity markets and
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other countries have much smaller equity
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markets and my research addresses one of
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the reasons why we see those differences
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in the size and the vibrancy the
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dynamism of equity markets which is the
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extent to which the interests of
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minority shareholders are protected the
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argument is that when you have strong
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protections for the interest of minority
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shareholders then more people are
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willing to invest money in the stock
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market and as a result what you get is a
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larger stock market with more turnover
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and higher capitalization and more
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dynamism
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so what we did in this research is we
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coded the legislation exist in different
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countries since 1970 all the way to the
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present and we looked for legal
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provisions that protect the interest of
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minority shareholders and what we found
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was that at the beginning back in the
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1970s the US and the UK and other
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countries that have a common law legal
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system having placed very strong
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protections for minority shareholders
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but then beginning the 1990s and
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especially over the last 15 years
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countries in Eastern Europe countries in
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Asia even some countries in Africa that
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used to have very very weak protections
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of minority shareholders change their
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legislation and they introduced actually
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quite strong protections and in some
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cases stronger than those present in the
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United States or the UK so in addition
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to finding that countries that didn't
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use to have strong legal protections now
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have them we also found that adopting
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the legal provisions defending the
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minority shareholders is not enough that
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you also need to enforce those kinds of
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regulations protecting minority
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shareholders and that is a very
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important finding because essentially it
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means that you know a lot of countries
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out there introduced these reforms for
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show only for so as window dressing but
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it's also important to follow up with
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enforcement otherwise you don't get the
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expected results which is you know the
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growth of stock market capitalization
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and a more dynamic equity market
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for me the biggest surprise coming out
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of this research project that was what
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happened in Eastern Europe and the
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former Soviet republics also including
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Russia itself because as you know most
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of these countries became independent in
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the 1990s so they didn't have their own
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separate corporate legislation and they
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were very aggressive in terms of
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introducing very advanced laws that
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protected minority shareholders and my
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assumption going in was that the in
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these countries actually the effects
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wouldn't be that great in terms of stock
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market development because I thought
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they were just adopting these things you
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know for fun they were just adopting
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these things to tell the IMF that they
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as they were introduced in reforms they
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were adding all of these new legal
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provisions just because they failed that
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it was the right thing to do so I was
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surprised to see that even within that
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set of countries right we're talking
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about maybe 20 or 25 countries in
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Eastern Europe and you know the former
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Soviet republics you observed that the
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implementation of these laws has
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resulted in the growth of a stock market
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which is something that I don't think
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most people would have expected and I
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certainly was not expecting
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well I think my reach
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has implications for both practitioners
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especially investors and for
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policymakers so let's start with
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investors for investors we all know that
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the world has become one big marketplace
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and essentially capital is chasing the
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best returns but obviously you also need
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to take into consideration the legal
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framework is not the same to invest in
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the US equity market as it is to invest
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let's say in the Nigerian equity market
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or in the Chinese equity market and
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that's for a variety of reasons what my
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research does is it you know cause the
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attention to the importance of legal
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institutions because at the end of the
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day portfolio investors they want to be
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protected they want to be able to sue
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they want to be able to have legal
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mechanisms at their disposal if they
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believe that they've been taken for a
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ride that's the implication for
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investors I offer them a map and in fact
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anyone can download the data that we
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have put together painstakingly for more
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than 70 countries between 1970 and the
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present time and those data are
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available from my website at the Wharton
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School now for policymakers I think the
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lesson is also clear which is that it
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does pay to introduce market-oriented
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reforms in the form of no legal
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institutions that support economic
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exchange and support the investment and
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at the present time as we all know
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governments around the world are
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competing against one another to attract
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investment so it is very very important
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for governments to realize that they
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need to have the right legal framework
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in place because the ultimately the
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development of their equity markets
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depends on the extent to which the
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protections of you know for minority
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investors are in place and also the
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extent to which they are actually
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enforced
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well I think the conventional wisdom is
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that there are safe markets in the world
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in which it is you know okay to invest
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and that you're likely not to lose your
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money for some you know strange reason
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other than that maybe you know the
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market goes south right meaning that
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it's very difficult for either the
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government or other interests to
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expropriate investors right which
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happens in many parts of the world I
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think that conventional wisdom is
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largely true that is to say yes you can
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classify countries right according to
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how easy it is for you to protect your
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rights as a minority investor what my
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research I think does is it addresses
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this myth that you know whatever the
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situation was back 30 years ago
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continues to be the same today that is
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to say what we observe is that laws and
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regulations concerning minority
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shareholders change all the time and
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countries that used to have very low
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protections do they actually have very
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strong protections in place and so it's
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very important for investors and for the
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general public i think to understand
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those legal frameworks because otherwise
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you could be making big mistakes as to
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exactly how you allocate your
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investments and let's not forget that
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most of us have a pension fund right and
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we can make choices about how we
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allocate you know the money that we have
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in it let's say between us equities and
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foreign equities and then within foreign
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equities different parts of the world so
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I think it's really important for us as
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citizens who have a pension fund to also
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understand these dynamics and how legal
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institutions effect or potentially can
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affect that returns to our investments
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what I think is unique about our
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research years how comprehensive the
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data are so we have hired more than 50
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experts legal experts lawyers from
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different countries who speak the
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language and they read the relevant
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legislation over a period of 45 years
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since 1970 and they coded all of these
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different legal provisions so it is the
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detail that we have in our data it is
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the fact that we've covered nearly 80
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countries more than 70 countries over 45
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years that I think is unique about our
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research and the later can be downloaded
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for free from my own website within the
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Wharton school's website
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well now that we have these data on
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minority shareholder protections around
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the world we are planning to examine
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what happens after a major financial
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crisis such as for example the one that
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took place in 2008 as we know there's a
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lot of restructuring there's many
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marriages and acquisitions or what we
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want to understand is whether the way in
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which crises are resolved in which
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assets are restructured is different
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depending on the strength of different
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stakeholders in the firm and one very
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important stakeholder of course is
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minority shareholders and so we are
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expecting that the ways in which crisis
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unfold and ultimately are resolved are
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different depending on whether you're
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talking about a country that has very
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strong protection of minority
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shareholders versus another in which
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those protections are very weak
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you
