The Challenges of Quantifying Investor Protection in a Comparative Context

Abstract

La Porta et al. have made a number of influential empirical contributions linking the level of investor protection in different countries to the development of capital markets. They find that rules associated with common law are superior in fostering larger and broader capital markets, especially compared to countries based on the French civil law tradition. However, this article argues that the existing methodological approach is problematic when subjected to careful legal analysis based mostly on Scandinavian examples. In particular, one may question the appropriateness of relying on legal indices, as laws by their very nature cannot be stacked like bricks of similar size. Furthermore, it is argued that the notion of investor protection needs to be considered in a consistent, complete and unbiased manner, in which the binary categorisation should be modified. Specifically, due to the ambiguity of formal investor protection rights, it is suggested that the ratio of actual minority votes cast at the general meeting to the total number of minority shares may serve as an alternative proxy for the real degree of investor protection.