Against Legal Origin: Of Ownership Concentration and Disclosure

Abstract

Using a sample of 49 countries, Rafael La Porta et al ((1997) 52 Journal of Finance 1131) showed that countries whose legal rules originate in the common-law tradition tend to protect investors considerably more than the countries whose legal rules originate in the civil-law, and especially the French civil-law, tradition, with the German civil-law countries and Scandinavian countries taking an intermediate stance toward investor protection. The concentration of ownership in La Porta et al's research is treated as an adaptive response to poor investor protection. In this article, we use evidence from China and other places to demonstrate that the political economy is more important than the legal origin in explaining the weak protection of minority shareholders in China's transitional economy. We argue that the concentration of state ownership in China's listed companies is a direct result of the government's political goal of controlling most of the listed companies. We further show that the political goal of maintaining control of most of the listed companies by the government weakens the protection of minority shareholders in China.