| The Politics of Financial Development
Legal Origin vs. the Politics of Creditor Rights: Bond Markets in Brazil, 1850-2002
This paper explores the question: Do institutions persist over time and determine current economic outcomes? Specifically, does the adoption or inheritance of a legal tradition in the past determine the subsequent course of institutional and financial development? This paper attempts to answer this question by examining the history of bond markets and creditor rights in Brazil as well as evidence of creditor rights protections in a cross-section of common and civil law countries. The tested hypotheses are from the law and finance literature, which argues that legal origin determines both the extent of investor protections and level of financial market development (La Porta, Lopez de Silanes, Shleifer and Vishny, 1997, 1998, 2000). I test three hypotheses. First, I test whether the idea that legal origin exerts a persistent effect on financial market size can be defended. The significant variation I find in bond market size and creditor protections over 150 years does not support the notion of persistent effects of legal origin. Second, I test whether a path-dependent effect of legal origin can explain the level of creditor protections in Brazil. Finding, following the methodology of La Porta et al. (1998), that creditor rights vary too much over time to be determined by legal origin. I propose that the time-variance of investor protections is better explained by the existence of a political economy channel. Finally, I test whether the relationship posited by the law and finance literature between legal origin and creditor rights holds for a (small) cross-section of countries in the past. I present evidence that in 1910 legal origin did not explain the differences we observe across countries today. In fact, for the few countries I study, French civil law countries had, on average, stronger creditor rights that common law countries.
Government and Politics;
Financial Services Industry;