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BEYOND LEGAL ORIGINS: SHAREHOLDER PROTECTION
AND STOCK MARKET DEVELOPMENT IN FRANCE
(1852-2007)
Frédéric Serpoul1
December, 15, 2009; revised June, 15, 20132
Working Paper presented at the European Historical Economics Society Conference,
London School of Economics and Political Science (September, 6th
-7th
, 2013).
ABSTRACT
This paper is the first long-run historical analysis of stock market development and minority
shareholder protection in France (1852-2007). For this purpose, we have constructed a unique
time series of shareholder protection indices (anti-director rights and securities law) and
relied on triangulated and extensive secondary time-series data on French stock market
development.
Our analysis indicates that, contrary to the predictions of the influential ―Law and finance‖
theory, formal investor protection was not a crucial determinant of stock market development
in France from 1852 to 2007. In addition, beyond its conceptual shortcomings, ―Legal
Origins‖ theory is not able to account consistently for differences in levels of shareholder
protection between Civil law France and Common law countries across the century.
Furthermore, the evidence provided suggests that trade openness alone was not a critical
contributor to the development of French equity markets in the period considered.
Rather, we suggest that a political explanation, which incorporates the preferences of social
classes and interest groups, the distinct impact of political institutions, as well as the pre-
existing or concomitant complementarities among economic institutions, may be a better
option in explaining the variance in stock market development in France over time.
1 This paper is derived from a master‘s research project undertaken at the Saïd Business School, University of
Oxford (2009), under the supervision of Dr Ventresca (Wolfson College, Oxford). As of Dec‘09, the author was
affiliated with Wadham College, University of Oxford. The author is currently affiliated with Standard
Chartered Bank. The findings, interpretations, and conclusions expressed in this paper are entirely those of the
author. Author‘s contact details: [email protected] ; [email protected]. 2 I am very grateful to Dr Ventresca (Wolfson College, Oxford and Saïd Business School) for his valuable
guidance. I am particularly indebted to Dr Hautcoeur (Ecole Normale Supérieure, PSE and EHESS) and Dr
Bozio (UCL) who kindly provided me with their own primary research data and datasets. In addition, I benefited
greatly from discussions with Dr Mayer (Wadham College, Oxford and Saïd Business School), Dr Sgard
(Sciences-Po Paris) and Dr Sussman (Wadham College, Oxford and Saïd Business School) All errors are the
responsibility of the author.
2
“Les lois sont toujours utiles à ceux qui possèdent et nuisibles à ceux qui n’ont rien”, Jean-
Jacques Rousseau (Du Contrat Social, 1762).3
Introduction
Building on the intuitions of Bagehot (1873) and Schumpeter (1912), a growing body of
theoretical and empirical research suggests that financial ―development‖ is a central
determinant to economic growth (See e.g. King and Levine, 1993; Demirguc-Kunt and
Maksimovic, 1998; Jayaratne and Strahan, 1996; Mishkin, 2006, p.25). In particular, stock
market development, that we will define as the ease with which any entrepreneur or company
with a sound project can obtain equity finance4, plays a key role in financing new and
innovative firms with little tangible assets, central to the Schumpeterian ―waves of creative
destruction‖ of capitalism (Rajan and Zingales, 2003). Nevertheless, despite its presumed
benefits, the development of equity markets varied substantially across time and countries. In
addition, empirical evidence indicates that the levels and changes in financial development
across countries and time cannot be reduced to mere differences in the demand for finance.
These two observations suggest that, contrary to neoclassical economics tenets, there may be
―structural impediments‖ to the supply of finance rising to meet the demand for finance in
the economy (Rajan and Zingales, 2003). In particular, an increasing influential body of
literature sees investor protection as the key ―structural‖ determinant of variance in financial
development, and especially in stock market development. (See La Porta et al., 1997, 1998;
Modigliani and Perotti, 2001).
In this context, a historical analysis of investor protection and stock market development in
France, a country that experienced a ―great reversal‖ (Rajan and Zingales, 2003) in the
development of its stock markets and that created a legal system that presumably constrain
investor protection, may improve our general understanding of the determinants of these two
critical variables. This paper is the first attempt to analyze the long-run evolution of
shareholder protection and stock market development in France. In particular, we will address
the following research questions: Can shareholder protection account for the evolution of
stock market development in France? How can we explain the ―great reversals‖ in the
development of French stock markets over time?
Following a brief review of the literature and of our research design in Section 1, Section 2
will present a new time series of investor protection and stock market development in France.
Section 3 will attempt to test dominant theories of financial development in the French
context. Finally, Section 4 will provide preliminary lessons arising from the French case and
potential venues for future research.
3 Can be translated as: Laws always benefit those who own and harm those who own nothing.
4 The definition of a ―developed‖ stock market is often not fully addressed in the literature. We consider stock
market development as a normative rather than a descriptive concept, in line with the ―financial development‖
literature. Many authors tend to evaluate the level of development of stock markets based on the ―large‖ ex post
size of public equity markets in the economy. Given the alternatives for external finance available for firms, we
believe that an ex-ante concept of ―stock market development‖, defined as the ease with which firms can raise
equity capital to finance positive NPV projects, is a better alternative than an ex-post measure. Such approach
gives rise to ―operationalization‖ and measurement issues. (See Section 3).
3
1. SECTION I: Literature Review: shareholder protection and
financial development
1.1 Limitations of private ordering mechanisms in corporate finance
According to early standard finance theory (Early Modigliani-Miller theorem, 1958),
arbitrage between prices of financing instruments in a perfect capital market ensures that
capital structure was irrelevant, absent tax (and, later, financial distress). The inability of this
theory to make sense of the diversity in financial systems led to reconsider the two key
assumptions of standard finance theories. Information is not the same for every agent,
especially investors and managers. Contracts cannot specify ex ante and enforce ex post all
contingencies. (Grossman and Hart, 1980)
These limitations to the complete market model are particularly acute for corporate
governance. Indeed, the extent to which managers (―Agents‖) maximize the residual claim of
the shareholders (―Principals‖), will be affected by information asymmetries (Jensen, 1986)
and contract incompleteness problems.
Due to transaction costs (Coase, 1937; Williamson, 1975), information asymmetries (Jensen
and Meckling, 1976) and incompleteness of contracts (Grossman and Hart, 1980) as well as
collective action dilemma (facing dispersed investors to monitor managers), the effectiveness
of private ordering, advocated by the Law and Economics literature (Stigler, 1971), may be
limited. Indeed, even the purest Coasian solutions of private contracting need impartial
instruments to enforce elaborate contracts5 (Modigliani and Perotti, 2001). Furthermore,
transaction costs may not necessarily be lower in the case of purely private contracting. (La
Porta et al, 2008).
Overall, given the ambiguity of the theory with regards to the relative efficiency of private
ordering and public regulation (or their complementarities) for financial contracts, the
literature resorted to empirical analyses of corporate governance and financial development.
1.2 Determinants of stock market development
The combination of the theoretical development on agency costs between shareholders and
managers and the empirical evidence of structural impediments to supply of savings meeting
the demand for finance have led researchers to consider the role of structural factors in
explaining both financial development and the diversity of financial systems across countries.
According to the Law and Finance theory (See: La Porta et al., 1997, 1998, 2003, 2008; Beck
et al. 2003), law is the critical factor that explains stock market development. In particular, in
different cross-sectional analysis (1990‘s), La Porta et al. showed that legal protection of
minority shareholders from expropriation from controlling shareholders and managers was
correlated with the development of equity markets.
The literature points to two key explanations in the observed correlations. First, taking into
consideration agency costs and information asymmetries, potential shareholders should pay a
5 Asymmetric information is a key impediment to optimal private arrangements. Aghion and Hermalin (1990)
pointed out how regulation could improve the efficiency of private contracting by reducing the need for costly
signalling equilibria. (See also: Modigliani and Perotti, 2001).
4
higher price to equity issued by firms with higher protection mechanisms from insiders and
firms will find it easier to raise external finance in a jurisdiction with better minority
shareholder protection. Second, when minority shareholder protection is low, controlling
shareholders/entrepreneur will be reluctant to disperse control rights to outsiders in order to
maintain their high private benefits of control (See Zingales, 1995; Bebchuk, 1999).
Accordingly, La Porta et al. (1998) showed that concentrated ownership was positively
correlated with low investor protection in the mid-1990‘s. Indeed, since dispersed minority
shareholder face collective action dilemma and a free rider problem in monitoring managers,
concentrated shareholders are better able to discipline managers (i.e.prevent shirking, stealing;
maximize shareholder value) than dispersed shareholders when minority shareholder
protection is low. (Demsetz and Lehn, 1985).6
In contrast to the ―Law and Finance‖ theory, a promising line of research has started to
emphasize complementary or substitute forms of investor protection such as trust (Franks et
al., 2006; Mayer, 2008), and culture (Stulz and Williamson, 2001) that may also promote
diffuse ownership and the development of stock market in the economy.7
1.3 Determinants of shareholder protection
Given the posited importance of shareholder protection for stock market development, the
literature has also tried to better explain the sources of the significant variance of shareholder
protection across countries. Broadly speaking, existing research point out to two main
categories of investor protection determinants: legal origins on the one hand and politics on
the other hand.
In their theory, La Porta et al. (1998) explain that the ―Legal Origin‖ of a country determines
its subsequent levels of shareholder protection. Indeed, robust empirical evidence from the
1990‘s suggests that countries with Common Law origins have markedly higher levels of
minority shareholder protection than countries with Civil Law origins.
A second stream of the literature emphasizes the role of politics as drivers of shareholder
protection. Indeed, contrary to the predictions of the Law and Finance theory, the seminal
paper from Rajan and Zingales (2003) has shown that stock market development in Civil Law
countries were not less developed than in Common law countries in the past. In this view,
financial development is ultimately determined by the outcomes of interest group politics. In
particular, for Rajan and Zingales (2003), openness in capital and trade removes the
incentives of domestic incumbents to repress financial development and investor protection.
Roe (1994, 1999, 2003, 2007) attributes the difference in investor protection to the strength
of labour power, as mediated through the left/right partisan political struggles, with the
former likely to better protect inside labour at the expense of minority investors.
6 Concentrated owners however forego some diversification benefits that can accrue to dispersed shareholders.
7 To our knowledge the following countries were subject to in-depth historical analyses of financial
development: Germany (Franks, Mayer and Wagner, 2006), UK (Franks, Mayer, Rossi, 2006), Japan (Franks,
Mayer, Miyajima, 2007), Italy (Aganin and Volpin, 2003) and Brazil (Musacchio, 2007).
5
1.4 Contribution to existing research
Our research is the first long-run historical analysis of the determinants of stock market
development and investor protection in France.8 We will seek to answer two key research
questions: To what extent can shareholder protection account for the variance in the
development of equity markets in France? How can we explain the ―great reversals‖ in the
development of French stock markets?
In section 3, we test whether associational and causal relationships predicted by the main
theories of financial development, Legal Origins theory and Trade Openness theory, do
indeed hold over time in France. The theories being evaluated were chosen based on their
robustness in explaining cross-sectional patterns, their influence in scholarly literature and
policy-making, and their parsimony.9
The combination of the quantitative/qualitative designs, coupled with the consideration of the
complex idiosyncrasies of a single country case, will enable us to go beyond deductive theory
testing and provide inductively preliminary generalization in section 4.
The French case is of particular relevance for debates on the determinants of financial
development:
First, France constitutes a ―critical‖ case (Yin, 2003, p.39) to test the validity of the Legal
Origins theory, the dominant thesis of financial development in policy and scholarly debate.
Indeed, Civil law originated from France, with the Napoleonic codification of 1804, on the
remnants of the Roman legal tradition.10
Moreover, by definition, France is the only civil law country where civil law was not
―imposed‖ or transplanted in some forms. Consequently, the analysis of the French case
would yield valuable insights to the debate by separating impacts attributable to ‗civil law‘
per se (contentions of the theory), from other impacts, such as the consequences of legal
transplant processes in other geographies.
In addition, the focus on the French case is defendable on the grounds of the country‘s
relative importance in the world economy (7% of World GDP in 1870, 5% in 2001,
Maddison, 2001) and financial markets (Third largest equity markets in 1913; Rajan and
Zingales, 2003). The presence of a sizeable outlier to the major theories of financial
development should lead us to question the existing theories in their current form.11
8 A very different type of contribution from Lamoraux and Rosenthal, who analyzed the flexibility of
organizational forms in 19th
century France (2005), on the basis of Hilaire‘s contributions (1986). 9 See references to LLSV in the EU Commission and World Bank reports. By definition, the longitudinal data
design test can assist in testing time-invariance and, as a consequence, the general validity, of the associations
between variables predicted by the theories. In addition, in comparison with a cross sectional design, a
longitudinal time-series design enables us to better deal with the ambiguities of causal inference, by improving
our understanding on the time order of variables. 10 One may argue that the analysis of the French case may not be a strict test of the Legal origins thesis
significance because legal origin is in effect held constant when focusing on a single country. However, the in-
depth and longitudinal study of the French case will enable us to test critical inferences with respect to
relationships between legal origins (held constant) and financial development.
6
2. SECTION II: A new time series - the evolution of Shareholder
Protection and Stock Market Development in France (1852-2007)
2.1 Data: Stock Market development: definition, measurement and sources
2.1.1 Defining stock market development
There are many dimensions that may be used to evaluate the ―development‖ of stock market
such as stock market size, liquidity, volatility, institutional development, or international
integration (Demigurc-Kunt and Levine, 2008).
According to standard finance theory, financial development would be deemed to occur when
any positive Net Present Value project/asset would be able to be funded through external
finance, regardless of the project/asset‘s owner (i.e. regardless of the owner economic net
worth or his family, social and political networks and affiliations). Following Rajan and
Zingales‘ definition (2003), financial development would also be characterized by the ability
of the financial system to evaluate risks adequately and allocate them to the parties that can
best bear them, at a low cost. Accordingly, stock market development would be deemed to
occur when any issuer in need of equity finance would be able to finance positive NPV
projects without constraint.
However, this definition is not amenable to operationalization and ex-post observations. We
will therefore consider two crude proxies for stock market development: the standard
Domestic market capitalization to GDP and the not-so-standard Domestic issues/Corporate
Gross Fixed Capital Formation.
2.1.2 Measuring stock market development
2.1.2.1 Domestic market capitalization to GDP
This measure refers to product of share price and the number of share outstanding for all
domestic stocks traded on the exchanges of France. It therefore includes a value component
(share price as Present Value of future cash flows of the listed firm) and a volume component
(companies listed on the exchange). It captures the size dimension of stock market
development.
The drawback of this measure is that it does not capture the development in terms of liquidity.
Large markets may be large but not ―active‖ (Levine and Sverkos, 1998)
In addition, the evolution of Market Cap/GDP is more difficult to interpret because of the
large number of factors that can affect this ratio, such as market valuations derived from
investors‘ expectations and changes in volume of listed company (e.g. nationalization;
indirectly, variations in firms‘ share of GDP).
Ideally, the External Market Cap/GDP, with external market capitalization defined as the
proportion of minority shareholders owning publicly listed firms would be a much more
valuable indicator in the context of our study. However, detailed historical ownership data on
public shareholdings in France is minimal, fragmented and hardly reliable.
7
Domestic stock market capitalization data12
is sourced from primary exchange data
collections from Arbulu (1998) for 1852-1900 (only ordinary shares and Paris exchange)13
,
Hautcoeur (1994)14
, Petit (2001) and Bozio (2002) for 1900-1945 (―Côte officielle‖ record
for Paris, Coulisse, Lille primary data and estimates from secondary sources for other
regional exchanges) and SBF/Euronext for 1945-200715
(reliable). It adjusts for various
shortcomings in the data used in earlier economic and financial studies that solely relied on
often contemporary secondary sources. In fact, the data source used by Rajan and Zingales in
their seminal 2003 paper (i.e. Saint-Marc, 1965, 1975, quoted in Bouvier, 1970) is likely to
include domestic and foreign stocks16
and relies on indirect estimates of capitalization,
inferred from government tax revenue on dividends and aggregate estimated average
dividend yield applied to all listed companies, which contributed to their overestimation of
pre-1914 capitalization.17
Unfortunately, GDP figures18
reflect value-added in metropolitan France (with temporary
exclusion of Alsace-Lorraine in 1871-1918 following the Prussian annexation) while colonial
companies domiciled/deriving substantial cash flows from the French Colonial Empire were
indiscriminately classified as ―French‖ companies in the exchange records from late 19th
century to early 1960‘s (estimated to c.19% of capitalization in 1946; c.9% in 1955; Bozio,
2002). Also, provincial and Coulisse exchanges (underestimation of probably 10-15%,
Arbulu, 1998) data were not available for 19th
century data.
2.1.2.2 Domestic equity issues to Corporate Gross Fixed Capital Formation
This indicator refers to the amount of equity capital raised through initial public offering or
seasoned equity offering by domestic companies, as a percentage of corporate domestic
investment measured as corporate Gross Fixed Capital Formation (GFCF). Corporate Gross
Fixed Capital Formation is equal to the total value of producers‘ acquisitions of fixed assets,
net of disposals. This is our preferred measure because the decision to issue equity by firms
(and to subscribe to equity issues by investors) is more likely to be sensitive to marginal
changes in the environment and investor protection than is stock market capitalization.
Yet, this indicator has several shortcomings:
12
See Appendix for details on sources. 13
Approximate underestimation of c.15% 1852-1900. (Bozio, 2002). 14
Hautcoeur (1994) collected ordinary shares valuations for 1901, 1913 and 1928 for the Paris exchange
primary ―Côte Officielle‖ source. Under the ―ESF‖ programme, Petit (2001) and Hautcoeur extended the data
collection to all shares from the ―Côte Officielle‖ of the Paris exchange from 1920 to 1938. Petit (2001) further
collected detailed shares data for the Lille exchange for the 1900-1962. This data was sourced from Bozio
(2002). 15
Aggregate capitalization data are from ―l‖Année Boursière‖, collected from Bozio (2002). Post 2001 data
collected from Euronext. 16
Rajan Zingales‘s 78% market cap/GDP in 1913 includes foreign stock (Bouvier and Saint Marc as source, See
Bozio, 2002). 17
The method would also underestimate market capitalization because far from all listed companies pay
dividends. 18
We benefited from the latest advances in economic history research to obtain reasonably accurate GDP
estimates. See Toutain (1996) for the on-going debates on the reliability of previous GDP estimates for 19th
century French GDP data, which, unsurprisingly, bear large variance across estimates (e.g. Levy-Leboyer,
Crouzet and Toutain).
8
First and foremost, existing data reconstructed for corporate investments and, particularly,
equity issues, still bears limited reliability prior to 1939.
In addition, the indicator excludes net working capital investments and does not normalize for
listed companies investments.19
Furthermore, it tends to be highly cyclical (Pagano et
al.1998). Moreover, the macro-economic nature of this indicator does not allow us to capture
valuable insights such as company location, size, sector or offering type (IPO vs Seasoned)
factors. Indeed, empirical studies have shown that equity issues are driven by a multiplicity of
other factors beyond external financing need, such as, inter alia, age of firms, nature of their
assets (Zingales, 1998), market timing and balance sheet rebalancing (Pagano et al., 1998),
enhanced stock-trading liquidity (Zingales, 1995), efficient transfer of controls (Roell, 1996)
or takeovers operations motivations (Franks and Mayer, 1996).
Finally, by normalizing gross fixed capital formation by corporate investment (i.e excluding
government, households and agricultural investments), we are in effect trading conceptual
rigor for comparability. Due to the uniqueness of our indicator in the literature, we are not
able to compare it with the (already) very limited historical work on financial development,
notably the paper from Rajan and Zingales (2003).
Equity issues from 1892 to 1936 are derived from Hautcoeur dataset (1994), which was
generated from detailed manual collection of Paris exchange data for French companies (i.e.
regional bourses and Coulisse not available: possibly 15%-20% and 10%-5%
underestimation for pre-1939 period and 1940‘s-1970‘s, respectively). Unlike the SGF and
Credit Lyonnais statistics, the sources of most economic and financial historians to date, the
Hautcoeur data adjusts for the incidence of issuance premia, free shares, actual (rather than
nominal) values of shares and actual payments of issued capital (Marnata, 1973; Hautcoeur,
1994). Equity issues for 1936-1939 and 1950/1960 were sourced from Sauvy (1984) and
Rajan and Zingales (2003) respectively. Yearly equity issues after 1974 collected from Paris
Bourse/Euronext official records are deemed reliable.
Corporate Gross Fixed Capital Formation data was calculated from various macro-aggregates
from Carré, Dubois and Malinvaud (1972) for 1892-1896, Bourguignon and Levy-Leboyer
(1985), Villa (1993) for 1892-1949 and INSEE for 1949-2007.
2.1.2.3 Other measurements considered
The Domestic listed company per capita indicator (Appendix B) does not appear to be a very
valuable proxy of financial development because it tends to reflect more the evolution in the
productive structure of the economy rather than financial development per se (See Chandler,
1990).
Valuable indicators such as Trades/Market Cap and Trades/GDP, liquidity, voting premia
(Dyck and Zingales, 2004), Tobin‘s Q (La Porta et al., 2002), and ownership dispersion (La
Porta et al., 1999) could not be calculated based on the existing data.
19
This is acceptable since our focus is on the size of stock market financing in the economy rather than the
micro-determinants of firms‘ financing decision.
9
2.1.2.4 Conceptual considerations
In some sense, a more fundamental caveat of our two indicators is that they do not fully
capture the substitutability between equity financing and other forms of external finance.
Refinement of Modigliani-Miller irrelevance theorem (1958) points out to the existence of
trade-offs or preference in firms‘ financing decision. Trade-off theory posits that firm‘s
capital structure is a result of optimization between tax and financial distress costs. Pecking
order theory (Myers and Majluf, 1984) documents that, mainly as a result of information
asymmetries, equity issues are likely to occur after accumulated internal finance20
and
external debt means of financing were exhausted. In light of those theoretical considerations,
without data on debt (bank/bonds), it is difficult to know whether equity markets rise because
of relative disadvantage of debt markets/bank/Government financing rather than because of
intrinsic improvements that favour equity markets.
Nevertheless, stock market development is a ―purer‖ indicator of financial development to
the extent that it is normally closer to an arm‘s length market than other type of external
financing alternatives, such as bank finance and arguably bond finance (Hellwig 2000, Rajan
and Zingales, 2003), and hence more likely to be influenced by institutional factors and
private ordering issues. Similarly, a growing body of theoretical work (Boyd and Smith, 1996;
Allen and Gale, 2000) and empirical studies have emphasized complementarities and positive
correlation between stock market development and the development of financial
intermediaries (Sylla, 1998).
In fact, in France, in 1945-2007, corporate bond capitalization/GDP was positively correlated
with stock market capitalization/GDP (Bozio, 2002), while in pre-1914 France, the largest
equity issuers (34% of offerings in 1871-1918, Arbulu, 1988) and stock market
capitalizations were actually banks (in 1913: Banque de France, Credit Lyonnais and Societe
Generale; Hautcoeur, 1994).
Therefore, the potential shortcoming inherent in our narrow focus on stock market
development without due consideration of the evolution of alternative sources of external
finance, may not be as critical as initially feared.
2.2 Data: Shareholder protection: definition, measurement and sources
In order to address our research objective, we have built a unique dataset on shareholder
protection, from primary and dispersed secondary sources, covering the 1852-2007 period:
2.2.1 Defining and measuring shareholder protection
Shareholder protection can be defined as the set of mechanisms through which outside
investors protect themselves against expropriation by the insiders.
In order to ease operationalization concerns, and to ensure comparability and engagement
with the existing literature, we have restricted our measurement to „formal‟ institutions of
shareholder protection. As a result, the presence of shareholder rights against majority
20
We have tried to control for internal finance availability in our study with a very crude proxy. (Cf infra).
10
shareholders and directors as well as the disclosure, liability and enforcement regulations
pertaining to equity issuances were used to measure shareholder protection.
The first set of measures of shareholder protection is the LLSV index of shareholder rights
(La Porta et al., 1997) deemed to protect shareholders from managers/directors and
controlling shareholders. This includes an index to capture the separation of ownership and
control rights (―One share one vote‖) and an index for ―Antidirector rights‖: (1) Shareholders
are allowed to mail their proxy votes to the company (2) Shareholders are not required to
deposit their shares prior to the General Shareholders‘ Meeting. (3) Cumulative voting or
proportional representation of minorities in the board of directors is allowed (4) Existence of
oppressed minorities mechanism. (5) Minimum percentage of share capital that entitles a
shareholder to call for an Extraordinary Shareholder Meeting is less than or equal to 10%. (6)
Preemptive rights of shareholders waived by a shareholder‘s vote.
The second set of measure of shareholder protection considered over the 1852-2007 is the 3
―LLS‖ indices of ―securities laws‖ (La Porta et al. 2004):
- Disclosure requirements index: (1) Prospect; (2) Compensation; (3) Shareholders; (4)
Inside ownership; (5) Contracts Irregular and (6) Transactions indicators.
- Liability standards index: (1) Liability standard for the issuer and its directors; (2)
Liability standard for the distributor; and (3) Liability standard for the accountant
indicators.
- Public Enforcement standards index: (1) Supervisor characteristics index (2)
Rulemaking power index; (3) Investigative powers index (4) Orders index and (5)
Criminal index.
One obvious shortcoming to this set of measurement is that it does not take into account
enforcement of legal rules. Nevertheless, historical evidence suggests that the rule of law and
the efficiency and integrity of enforcement of laws and contracts in courts in the period
considered, with the exception of the Second Empire (1852-1870) and World Wars period
(1914-1918; Vichy regime), were not lower than in the UK or the US (David, 1985). In the
modern era, France ranks marginally above the US or the UK in terms of contract repudiation,
corruption (>US) or rule of law (>UK) (La Porta et al, 1998). Besides, empirical evidence on
late 20th
century data suggests that enforcement and rule of law are robustly correlated with
economic development, which was comparable between UK (arguably), US, Germany and
France (Levine, 1997).
A second limitation stems from the ‗default‘ nature of corporate law. Companies, through
the design and amendment of their charters, could contractually grant stronger shareholder
rights than the ones prescribed by the company laws, which define minimal shareholder
protection provisions. Yet, it appears from our (limited) secondary sources on corporations
and financial history that, in effect, the laws tended to exert constraint on majority
shareholders and directors in their drive to exploit minority shareholders. We are not aware of
instances of corporate charters granting substantially larger minority shareholder protection
than the one prescribed by the corporate laws, apart from documented incidences of voting
caps, graduated voting schemes and statutory dividends (usually 5%) (Lyon-Caen and
Renault, 1916).
11
2.2.2 Data and sources: constructing a new time series of shareholder protection
in France (1852-2007)
In order to construct the time series of shareholder rights and securities regulations according
to LLSV and LLS indices, we have relied to multiple and triangulated sources. In the absence
of specific studies on the subject by legal scholars and historians alike, we have relied on
fragmented evidence from contemporaneous legal treatises from the 19th
and 20th
centuries,
such as Planiol (1905), Planiol et al. (1942), Houpin and Bosvieux (1907, 1929, 1935) Lyon-
Caen and Renault (1891, 1916, 1924), Ripert (1951, 1981), Thaller (1898, 1903), Aubry and
Rau (1922), Hémard et al. (1972), Ripert and Roblot (2002), Guyon (1996), Cozian et al.
(2005), Merle (2003, 2007) and Bonneau and Drummond (2005) as a tool to preliminarily
identify potentially relevant laws and jurisprudence.
This initial identification phase was followed by detailed primary data analysis of all relevant
laws, decrees and regulatory rulings from the French Government official gazettes from
1852-2007 (Gazette du Palais, Sirey) and jurisprudence records (Mestre et al. 1995,
Legifrance, Vergé, 1877). We have also made use of comments and discussions of lawmakers
and experts (included in Gazette) and major official parliamentary/government reports
(Rousseau, 1893; Vienot, 1995, 1999; Bouton 2002; Conseil d‘Etat, 2001).
2.3 Findings: Evolution of shareholder protection and stock market development
1852-2007: a new time series
2.3.1 Stock market development:
2.3.1.1 Stock market size Market Capitalization/GDP observations and
stylized facts
We can identify from our dataset four broad phases of stock market development, defined as
Domestic Market Capitalization/GDP.
Figure 1: Evolution of domestic stock market/GDP (1852-2007)
0%
20%
40%
60%
80%
100%
120%
140%
18
51
18
70
19
02
19
06
19
10
19
20
19
24
19
28
19
32
19
36
19
46
19
50
19
54
19
58
19
62
19
66
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
20
02
20
06
Do
mex
tic
Sto
ck m
ark
et c
ap
/GD
P
Market Cap/GDP in France (1852-2007)
Market Cap/GDP (Author's Calculation: Bozio,
2002+Arbulu,1988+Toutain,1985+LevyLeboyer, 1965+Villa,
1993+INSEE+Euronext)Market Cap/GDP (Rajan/Zingales, 2003)
12
- c.1890-c.1930: Rapid development
From 1890‘s to 1930, following an extremely rapid development in the 1850‘s and 1860‘s,
the stock market becomes a major source of financing for the French economy, rising to
approximately 55% of GDP in the Belle-Epoque period prior to World War 1, and gradually
returning to high levels of capitalization in the 1920‘s (50%) following the post-World War I
short recession and high inflation (c.15%). Equities were notably driven by the high domestic
savings rates, inexistent (pre-1917) then low (from 1917) corporate and dividend tax rates21
,
low relative real returns on government bonds (negative real returns in 1914-1922),
acceleration of economic growth and the increased capital needs of the second industrial
revolution.
- c.1930-1939: Moderate decrease
The 1930‘s are characterized by decrease of capitalization levels to approximately 30% of
GDP in very adverse economic (great depression in 1932-1936) and political conditions
(nationalizations of railroads and armaments by the Popular Front Left government in
1936/37).
- 1946-c.1985: Marginal contribution to the economy in a State-controlled financial
system
From 1945 to mid-1980‘s, despite a temporary peak of market capitalization to moderate
levels (approx.30% of GDP) in the late 1950‘s and early 1960‘s, the stock market played a
marginal role in the French economy in a context of very high economic growth (5.1%
annually). Critically, the 1946 and 1981 nationalizations had the consequence of withdrawing
the largest firms from the Paris Stock Exchange. 36% of market capitalization at 1938
valuations in 1945 (Moreau-Neret, 1957, p.183) and 17% of Market capitalization in 1981
(Bozio, 2002) were nationalized. Remaining firms that were not state-owned relied primarily
on State funds (FDES) and banks (the largest three were also nationalized) for external
financing. In 1949, bank and direct State financing accounted for 32% and 41% of firms total
financing respectively (In 1966: 41% (bank) and 35% (State) of total corporate financing in
1966) (Hautcoeur, 1999)22
- c.1985-2007: Radical shifts in the French financial system
From mid-1980‘s, following the Socialist-initiated radical change in macroeconomic policy
(i.e. inflation and supply side focus, liberalization of credit, prices and interest rates controls),
major privatizations programmes undertaken in 1986 and 1993-2000 (equivalent to 7% and
10% of market capitalization respectively; OECD, 2001) and increased global capital and
trade integration of the French economy (end of capital controls in 1986), the stock market
underwent very rapid and intense development, with capitalization to GDP ratio increasing
substantially to more than 100% of GDP in the late 1990‘s and close to 90% of GDP in 2004-
2007.
21
Tax neutrality at personal investor level: dividend and interest tax rates on personal Income at 12%. We are
not aware of capital gains preferential tax treatment at the time. (Levasseur and Olivaux, 1981) 22
Double Tax credits on dividends in 1960/1978, which in effect increased substantially the after-tax equity
returns.
13
Overall, the broad historical trend is not exactly one of ―U‖, as characterized by Rajan and
Zingales (2003). The drop between the 1930‘s and 1950‘s is not linear and the levels of
capitalization reached in 1990‘s are markedly higher (approximately 40 percentage points)
than levels reached in early 1900‘s.
2.3.1.2 Stock market as a source of external finance for investments: Equity
issues/Gross Fixed Capital Formation (GFCF)
Figure 2: Equity Issues/Corporate Investments (1892-2007)
- c.1895-c.1913: sharp increase of equity issues as a source of investment finance from
5% to approximately 20 % prior to the first World War in a context of decreasing
internal financing rate 23
.
- c.1918-c.1927: decrease of equity issues as a source of investment finance
(mean=11%).
- c.1927-c.1930: historical peak of the reliance on equity issuance to investments (24%),
under improved economic conditions (Poincaré policy of inflation control; growth).
- 1930‘s-c.1985: minor contribution of equity issues as sources of investment finance.
(mean=4%).
- c.1986-2007: equity issues rise to become again a major source of investment
financing (mean=15%).
23
Driven by increased capex rather than lower margins.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
18
92
18
95
18
98
19
01
19
04
19
07
19
10
19
13
19
21
19
24
19
27
19
30
19
33
19
36
19
39
19
60
19
69
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
Domestic Equity issues/Corporate Gross Fixed Capital
Formation in France (1892-2007)
Domestic Equity issues/Corporate Gross Fixed Capital Formation
(Source, SGF/Credit Lyonnais, Hautcoeur data set, 1994; Villa 1993,
INSEE)
14
To summarize, our two indicators of stock market development (Size and Equity issues/
investment) point out to the following stylized observations: (1) The importance of stock
market development from c.1890-c.1930 (2) The lack of stock market development from
1945-c.1985 (3) The substantial development of equity markets financing from c.1985
onwards.
2.3.1.3 Stock market development in a comparative perspective:
Figure 3: Comparative stock market development 1913-1999
The use of new data for France and a broader perspective on the evolution of stock market
development yield interesting observations. The French stock market was indeed very
developed in early 1900‘s both from an internal historical perspective as well as a
comparative perspective.
Nevertheless, contrary to the claims of Rajan and Zingales (2003), the French stock markets
have never been consistently as developed as the British and American stock markets, even in
the late 19th
century and early 20th
century24
. In addition, after excluding for key outliers in
the data used by Rajan and Zingales (2003)25
, on average, civil law stock markets did not
seem more developed than stock markets in common law countries in 1913. However, in line
with Rajan and Zingales interpretation on ―great reversals‖ (2003) (per the limited sample)
the data suggests the contribution of stock markets to the financing of civil law countries
(France in particular) was significantly lower in the 1930‘s-1970‘s period than in the early
20th
century, particularly relative to common law countries.
25
Per Rajan and Zingales data (2003), in 1913, India had an estimated 2% market cap/GDP while Cuba had an
estimated 219% market cap to GDP, materially skewing the Common law and Civil Law averages (For more
concerns around the data used by Rajan and Zingales (2003). As a result, Rajan and Zingales reach the
conclusion that equity markets in Civil Law countries were more developed than in Common Law countries in
1913.
60%67%
43%
13%
38%
24%
10%
25%
77%62%
88% 90%
62%
102%
135%
58%
85%
146%
0%
20%
40%
60%
80%
100%
120%
140%
160%
19
13
19
29
19
38
19
50
19
60
19
70
19
80
19
90
19
99
20
07
Do
mest
ic s
tock
ma
rk
et
ca
p/G
DP
Stock market development by legal families 1913-1999 (Adapted and
modified from Rajan & Zingales, 2003)
France (Per Author's various sources)
Avge Civil Law (Brazil, Belgium, Egypt, France, Italy, Holland) (Source: R&Z, 2003, updated for France data per Author's)
Avg Common Law (Aust, South Africa, UK and US) (Source: R&Z (2003))
15
2.3.2 Shareholder protection in France: a new time series(1852-2007)
As highlighted in figure 4 below, Shareholder rights26
(1 share/ 1vote (0-1) and Antidirectors
rights (0-6) indices) display an increasing trend from 1852 (0) to 2001 (5), with five critical
junctures in 1867, 1933, 1960‘s (1961-66), 1986 and 2001, and an acceleration of reforms
towards stronger investor protection in the late 20th
century.
Figure 4: Evolution of shareholder rights in France (1852-2007)
With regards to securities regulation (Disclosure requirements, Liability standards and Public
enforcement standards), as summarized by figure 5 below, our data suggests shareholder
protection reached high levels in the 1980‘s following notable increases in 1907, 1935, 1966-
67 and 1986.
The key changes in shareholder protection and securities regulation are highlighted in table 1
below (See appendices C and B for further details).
26
We will call ―Shareholder rights‖ the combination of Antidirectors rights and 1 share/1 vote rights. We will
call ―Shareholder protection‖ the combination of shareholder rights and securities laws indices.
16
Figure 5: Evolution of Shareholder protection in terms of Securities laws (1852-2007)
Table 1: Major changes in Shareholder Protection in France (1852-2007)
0.17 0.17 0.17
0.33 0.33
0.67
0.75 0.75
0.22 0.22 0.22 0.22 0.22 0.22 0.22 0.22
0.53 0.53
0.63
0.77 0.77
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1851 1867 1907 1935 1961 1967 1986 1989 2001 2007
Securities Law Indices in France (1852-2007) (Source: Author's coding; see text/appendices for sources)
Disclosure Securities Law I: France (1852-2007)
Liability Securities Law II: France (1852-2007)
Enforcement Securities Law III France (1852-2007)
I. Shareholder rights Source and Date of Change
One Share one Vote
Never (0) (Note:Capped at 10 votes per shareholder since 1867. 1933:
Proportionality of votes to shares subscribed as "public order" measure.
Exception (art.1 for shares held for 2 years by same shareholder). 1966:
extension of voting rights according to time of holding (2 years) but
gvnt proposed cap increase to 5 (rejected by Parliament)
Proxy voting by mail Law of 03/01/1983, implemented by Decree (n°86-584) 14/03/1986): +1
Shares not blocked before meeting Law NRE 2001 Prevents shares blocking +1
Cumulative voting OR Proportional representationLaw of 1867 art.15 + Commerce Code (Corporate Interest) (e.g. See Cools,
2005)
Oppressed minorities mechanism (Right of Action OR right of appraisal)
Jurisprudence "Piquard" of Cour de Cassation (supreme court) 1961
"Piquard" +1; Note: LLSV did not include in their index in 1998,2000.
French concept of "Abuse of Majoriy" and "Corporate interest" enable
minority shareholders to litigate against the majority to taking action
against company interest and minority
Preemptive rights for sh (vote) to prevent dilution Decret-Lois (Decree with legal force) 08/08/1935 +1
% of share capital to call EGM at 10% Law of 24/07/1966 +1
II. Securities markets Laws
1. DISCLOSURE REQUIREMENTS 1907: +0.17, 1967: +0.17=>0.33, 1989: +0.33 => 0.67
Prospectus Law of 30/01/1907
Compensation in prospectusLaw NRE 15/05/2001 (Instructions COB/AMF for disclosure
requirements)
SH ownership structure Law of 1966
Inside ownership by directorsLaw NRE 15/05/2001 (Instructions COB/AMF for disclosure
requirements)
Irregular contracts outside ordinary course of business Never
Index of prospectus disclosure requirements for transactions with
related partiesLaw of 02/08/1989
2. LIABILITY STANDARDS 1807: +0.22 , 1907 =>0.22 (Art.1382 Civil Code per jurisprudence)
3. PUBLIC ENFORCEMENT1966/67: +0.63 (notably Art. 6-7-1 28.09.1967 ordinance);
02/08/1989: +0.1 => 0.73
17
- 1852-1867: The limits of private ordering mechanism (Shareholder rights: 0)
Prior to 1867, shareholder rights were neither sanctioned by the legislator nor greatly
protected by the jurisprudence (Commercial Code, 1807, Art.14-67). Due to rigidities in
limited corporation incorporation laws, shareholder protection was mostly left to private
contractual arrangements. The Napoleonic code of 1807 authorized two types of
organizational forms with rights to issue shares. The ―Société en Commandite par Actions‖, a
limited partnership with shares, and the ―Société Anonyme‖, a limited company with limited
liability for shareholders (Hilaire,1986,p.220). The incorporation of ―Sociétés
Anonymes‖/Limited corporation was subject to drastic government approval through the
‗Conseil d‘Etat‘ (Hilaire, 1986, p.221; 15 per year, Hilaire, 1986, p.232-33).
In response to the difficulty to obtain government approval to incorporate as ―Sociétés
Anonymes‖ in a context of accelerating economic growth and industrialization, French
entrepreneurs chose to incorporate extensively as ―Commandite par Action‖, which also
became the main shares issuers (―Commandite fever‖; Ripert, 1912, 1981; Freedmann, 1993).
Shareholder protection according to the LLSV composite index was equal to 0, since most
issues were made through ―Commandites‖ where shareholder rights were mainly left to
contractual arrangements between parties. Overall, despite minimal form of protection from
fraud granted by the jurisprudence in the 1850‘s-1860‘s (Hilaire, 1986, p.214-226) and the
Conseil d‘Etat insistence on voting caps for the incorporation of the few ―Sociétés Anonymes‖
(10-20 votes per shareholders, according to Lefebvre-Teillard, 1985, p.210), the decentralized
exercise of free contracting between entrepreneurs, managers and internal shareholders and
external shareholders, in such a weakly regulated environment, did not lead to arrangements
protecting minority investors.
- 1867-1935: Recognition of the need to protect shareholders (Shareholders rights: 1)
The free trade treaties with Belgium (1857) and, critically, Britain (1860 and 1862) signed by
the liberal regime of Napoleon III27
and the gradual acknowledgement by the Saint-Simonian
Imperial government (1852-1870) of the various shortcomings of ―Commandites‖ as an
efficient vehicle for French industrial development, led to impetus for change in French
company law. Following the decrease of capitalization requirements for Sociétés Anonymes
(1863) and, critically, the end of government approval for Sociétés Anonymes incorporations
(24/07/1867 law)28
, the legislator prescribed stricter organizational and functioning rules for
―Sociétés Anonymes‖ with the seminal law of 24/07/1867.
With this law, the concept of the company limited by share capital, uniting limited liability,
separate personality and dual governance structures (board, shareholder meetings), was
already in place in France. Protection against fraud was increased by the need to pay 25% (50%
for bearer shares) of subscribed capital and increase penalties. (Szramkiewicz, 1989, p.320).
The new corporate form enjoyed considerable success, especially for larger firms (976
―Sociétés Anonymes‖ incorporations vs 143 for ―Commandites‖ in 1881, Freedmann, 1993,
p.12).
18
By 1867, shareholder protection according to LLSV index was equal to 1 (See Houpin, 1907,
p.1 to p.145: Proportional voting for directors). Interestingly, explicit government guarantees
for default for sectors deemed ‗strategic‘ such as railroads and canals were also in place to
reassure bond and equity investors.29
(Arbulu, 1988).
A critical departure from LLSV‘s ratings cast doubt on the authors‘ characterization of
French law as rigid. Proportional voting provisions that would facilitate the election of
directors by minority shareholder are indeed not mentioned in statutory laws and codes. Yet,
the ―validity of clauses of proportional representation is generally admitted in French case
law‖ (Cools, 2005), well before the 1966-67 Reforms (See: Decree-Act of 1937; Guyon,
1996; Freyria, 1951, p.419). Hence, the ‗proportional voting‘ index should equal 1 from 1867
to 2007 instead of 0 for La Porta et al. (for mid-1990‘s).
Even though, proxy voting was explicitly allowed (art.28 of 1867 Law), in practice the use of
intermediaries without formal ex-post control of their powers greatly limited its benefits for
minority shareholders (―Blank‖ proxy see Houpin, 1907, p.71).30
Interestingly, although shareholder protection according to LLSV index remained stable in
the 1867-1933 period, at the margin, shareholder rights did not evolve in a linear fashion. For
example, in 1903, multiple voting shares were formally authorized (Law of 16/11/1903) with
a voting cap of 10 votes per share, thereby degrading the formal rights of minority
shareholders. Yet, by 1933, French corporate legislation recognized the principle of ―one
share-one vote‖ explicitly. Authorized multiple voting shares were deemed an exception to
this principle and were capped at 2 voting rights per share, subject to prior holding period of
2 years (Law of 19/11/1933).
In practice, a large obstacle to minority shareholder protection was the increasing usage of
multiple voting rights by managers and founding shareholders, permitted by the 1903 law,
and, until 1933, the restriction of attendance of general meetings to holders of minimal shares
in charters (typically 20-40 shares thresholds; Lyon-Caen and Renault, 1916; Hannah, 2007).
According to A.Sauvy (1984, p. 148), in 1928, 24% of companies listed in the Paris exchange
had issued multiple voting shares with documented large uses in Chemicals (39%) and
Electricity (40%) sectors. Widespread allocation of underpriced31
founder‘s shares to
insiders32
(with ―superdividends‖ subordinated to preferred/common stock dividends)
contributed to value expropriation, at the expense of minority shareholders. Non-listed
founder shares of the Paris bourse listed companies accounted for 18% (1890) to 12% (1936)
of total shares of Paris listed company (Hautcoeur dataset, 1994). Anecdotal evidence of
abuse of minority shareholders by managers and/or majority shareholders is widespread (e.g.
La Houilliere Bleue case (1932) Sauvy, 1984, p.148.; 130 MF ―Rochette‖ (1908),
Freedemann, 1993, p.56).
Despite efforts towards mandatory disclosure of basic financials and corporate acts (Law of
30/01/1907) and towards accounting harmonization (Law on intangibility of accounting
29
From 1883, as mentioned by Viller, 1955, p.189, cited in Hautcoeur (1994): statutory dividends could benefit
from Government guarantee in exchange of an increase of 32% surtax on dividends (to be confirmed by further
research). 30
Because LLSV index is Proxy by MAIL, not intermediary, index rating is still 0. 31
Underpriced by means of undervaluation of initial ―goodwill‖/intangible assets of founders, in a context of lax
accounting and auditing rules.
19
methods across accounting periods), the lack of accounting standards and the absence of
controls on the independence and qualifications of auditors restricted the actual impact of
these measures for investors.
Specific protection of external investors with respect to equity offerings were rudimentary, as
indicated by the low score in disclosure (0.17 after the 30/01/1907 law mandated the issuance
of a prospectus with all equity offering) and liability standards (0.22, art.1382 Civil Code),
below the securities law protection provided in Britain from 1929 (0.67 in disclosure laws
and 0.33 in liability standards indices; Franks et al., 2006).
- 1935-1961: Responding to abuses of majority shareholders and managers
(Shareholder rights: 2)
Shareholder rights improved significantly in the mid-1930‘s through changes initiated by the
Laval government33
, in a context of increased scandals involving minority shareholders
abuses (Sauvy, 1984, p.180-185), economic recession and acute political tensions arising
both from the far-Right (1934 movements) and from the Left (Communist and Socialists
Popular Front strategy 1935/36). In particular, as a result of the 1935 laws which granted pre-
emptive rights to shareholders in order to prevent majority shareholders abuses (dilution)34
,
LLSV shareholder right index rose to 2.
Other less significant changes to investor protection regimes occurred in the 1930‘s:
First, 1935 ―Decrees–Acts‖ significantly increased penal liabilities of directors (Penal Code,
art.405-406; modifications of art.15 1867 law) for fraud, inadequate information disclosure,
instances of fictitious ―apports en nature‖35
.
In addition, information and disclosure rights were strengthened. Prospectus and basic
periodic financial information for the Coulisse (informal) stock exchange were regulated for
the first time. To improve independence and technical ability of financial auditors, firms that
wanted to issue shares had to select auditors from a government-sanctioned list of qualified
auditors. (Laws of 1937).
Finally, the decree laws recognized the specificity of public offerings and issued strict
guidelines on prospectus information content, validity (increased sanctions) and
communication (―Demarchage‖ laws) between the public, issuers and intermediaries.
From the late-1930‘s to the late 1950‘s, apart from improvements in the disclosure regime
(e.g. public chart of account in 1946/47, increase in information requirements for public
registry in 1959), no major changes to shareholder protection for both shareholder rights and
equity issuance regulation regimes occurred.
35
A form of ―sweat equity‖.
20
- 1961-1985: Modernizing corporate law and strengthening minority shareholder
rights (Shareholder rights 4)36
Case law developments and the substantial statutory reforms of 1966/67 brought about
substantial improvements in shareholder protection with the provision of Oppressive minority
mechanism indicator (+1) and the right to call an Extraordinary General Meeting with 10% of
shareholders votes (+1, Law of 1966). As a result, shareholder rights rose from 2 to 4 in the
beginning of the period (1960‘s) where the changes were prevalent.
The provision of ‗oppressed minority mechanism‘ is of particular interest because of our
diverging analysis compared with La Porta et al.‘s (mid-1990‘s). In another illustration of the
―adaptability‖ of French Civil law (overlooked by La Porta et al.), oppressive minority
mechanism were consecrated by the supreme private law court (―Cassation‖), by applying the
theory of ‗majority abuse‘, derived from the Civil Code (art.1382), art.19 of the 1867 law and
subsequent doctrinal developments which were based on the principle of ‗corporate interest‘.
(Ripert and Roblot, 2002, p.168; Case ―Piquard‖ of 18/04/1961). As analyzed by both French
(See e.g. Guyon, 1996; Schmidt, 2004; Frison-Roche, 2006) and foreign scholars (Cools,
2005), this jurisprudential evolution granted unequivocally minority shareholders the right to
challenge the decisions of management in courts, not unlike ―fiduciary duties‖ standards in
US law.
In addition, the 24/07/1966 law and its various 1966/67 decrees brought about the largest
changes in French corporate law since the 1867 company law with higher institutionalization
of ―S.A‖ governance, the introduction of a new organizational form (German-type dual board
corporation), the creation of stricter regime for firms willing to issue public shares (―APE‖),
improved rights for third parties, shareholders, increased penal liability regime for directors
and prohibition of founder‘s shares (Mestre, 2005, p.29)
Moreover, according to securities laws pertaining to equity issues (LLS index), reforms in
securities law (Law of 1967) brought moderate positive changes in disclosure (0.17 to 0.33)
and public enforcement standards (0 to 0.53). The regulatory agency modeled on the SEC
created in 1967 despite initial modest mandate and means (information certification),
widened its powers significantly over the 1970‘s-80‘s to include ―protection of investors‖ and
the ―functioning of the financial markets‖.
Nonetheless, we would be mistaken in concluding that the 1960‘s substantial reforms were
the signs of an inexorable historical trend towards very strong protection for minority
shareholders in France. Indeed, our analysis of parliamentary debates shows that a large
proportion of deputies, government members and experts also aimed at weakening minority
shareholder rights, by attempting (unsuccessfully) to increase the cap for voting rights per
share from 2 to 5 and by widening the wedge between control and cash-flow rights at the
benefit of insiders. (See Hemard et al., 1972 p. 248).
- 1985-2007: Towards highly protected minority shareholders (Shareholder rights 5-6)
Authorization of proxy voting by mail (voted in 1983 by Socialists but only implemented by
decree by the Right government in 1986: +1) and the end of blocking of shares before
Shareholder meetings were part of a broader and conscious reforms by both Left (1983/84
21
juncture) and Right governments to develop the Paris Exchange, a market for corporate
control37
(Takeover law of Law of 02/08/1989: mandatory bid at 33% threshold), minority
shareholders rights (+2, to 6, well above 3, the world median according to La Porta (1998)
cross-sections), involvement of employees in governance, non-executive directors in boards,
as well as stricter liability, control and disclosure regimes (Law NRE 2001: disclosure: 0.67;
liability: 0.22; enforcement: 0.73).
By 2001, the level of antidirectors rights and securities regulation that protect minority
shareholders in France is at par with its common law American and British counterparts, and
among the highest in the world. This domestic trend has been reinforced by an increased
focus on stronger minority shareholder protection, market for corporate control and
disclosure requirements at the European Union level since the 1990‘s, as illustrated in
particular by the EU directives on financial instruments (1993), prospectus (2003),
transparency (2004) and takeover (2005).
In sum, the corporate governance regime in France gradually granted formal protection to
minority shareholders to levels not markedly different than the ones enacted and enforced in
the US and Britain in the late 20th
century. However, our historical depiction illustrates the
complexity and the non-linearity that drives the evolution of laws, policies and jurisprudences
of investor protection. Such observations should already caution us against overly
deterministic structural approaches to account for the emergence and dynamics of change in
investor protection.
2.3.3 Ownership patterns: tentative stylized facts
According to La Porta et al., dispersion of ownership is strongly related to stock market
development. Unfortunately, the absence of any primary data and reliable sources prevented
us from considering this critical variable.
Preliminary anecdotal evidence tends to suggest that shareholding was dispersed in France in
the early 1900‘s in, at least, the banking, transport (railways and canals) and utilities sectors,
which accounted for 79% (1880) and 52% (1920) of market capitalization (Arbulu, 1988; See
Neymark, 1911, cited in Gallais-Hamonno et al, 2007, p.411; Hautcoeur 1994; Hannah,
2007). Observations such as the documented instances of small lot of shares even trading at a
premium to larger lots of shares (Hannah, 2007)38
, the reduction in statutory minimal share
price (from 500F to 100F in 189339
, Hilaire, 1986), partial firm-level ownership records (e.g.
in 1900, the four largest shareholders of Paris-Lyon-Mediterrannee railway held 0.2% of
shares, Hannah, 2007; In 1908, shareholders with more than 25 shares accounted for 13% of
the six largest railway companies, 82% of Credit Foncier bank held less than 10 shares,
Gallais-Hamonno et al., 2007, p.504) or the increase of equities as a share of assets in
inheritance records for households from 9% to 39% between 1871 and 1915 (Michalet, 1968,
p.100), may all be indicative signs of ownership dispersion for larger firms (i.e. railroads,
finance, utilities, canals, i.e. 60% of capitalization).40
38
It raises the issue of private benefits of controls premia (no data available). 39
25 F for small firms. 40
Smaller industrial firms (probably c.50% of market cap) though seem to have remained in the hands of
insider-family control (Hannah, 2007).
22
The change to widespread blockholding patterns for large firms seemed to have occurred in
the aftermath of the Second World War, along with nationalizations and the emergence of a
new social system of production.
Following the 1983-85 “tournant de la rigueur” of the Socialists‘ economic policy in
conjunction with the increased cross-border capital and trade (e.g. end of capital controls in
1986, European common market), the privatizations of 1986-88 brought about a transition to
a ―noyaux durs‖ pattern around UAP-BNP and Paribas-AGF, characterized by cross-
shareholdings among the largest firms in France and significant government-owned stakes
retained in CAC40 firms (Goyer, 2003). Most SME‘s remained family-controlled. (Windolf,
1999).
In the mid-1990‘s to 2007, in a context of increasing liberalization and integration of French
financial markets41
, cross-shareholdings of the largest French firms were gradually liquidated
to dispersed households and institutional (mainly foreign) investors (46% (2006) and 39.2%
(2008) of CAC40 owned by foreign shareholders; Banque de France, 2009).
41
O‘Sullivan (2007) documents that the increase in seasoned stock offerings on the French stock markets in the
late 1990‘s-2000 were driven by acquisition and international expansion financing motives, a result of increased
product market competition. The intense competition from Europe and the world may explain the decision by
leading CAC40 financial institutions to unlock their previous cross-shareholding patterns in the late 1990‘s to
access larger pools of external finance, notably from foreign institutional investors.
23
3. SECTION III: Shareholder protection and stock market
development in France in light of dominant theories of financial
development
The detailed description and analysis of the evolution of stock market development and
investor protection in France over the 1852-2007 will enable us to evaluate the explanatory
power of dominant theories of financial development with regards to the French case: the
Law and finance theory in its ―LLSV‖42
Legal Origins variant and the Political Economy of
Openess and Incumbent theory.
3.1 Legal Origins and investor protection
3.1.1 Testing the Legal Origins theory in the French context:
Two key hypotheses implied by the Legal Origins theory will be tested in order to assess the
link between investor protection and stock market development on the one hand and the link
between legal origins and investor protection on the other hand.
- H1: Legal investor protection is monotonically related to stock market development:
(Shareholder protection => Stock market development)
Figure 6: Stock market development and shareholder protection (1852-2007)
As highlighted by figure 6 above and, as suggested by the comparison of stock market
development indicators under low shareholder protection (1852-1933) and under high
shareholder protection (1966-2007) (per appendix B-2), shareholder protection and stock
42
We refer to ―LLSV‖ and ―LLS‖ to allude to La Porta, Lopez-Silanes, Shleifer and Vishny, and La Porta,
Lopez-Silanes, and Shleifer respectively. We prefer the precise term ―Legal origins‖ to the broader ―Law and
finance‖ one to characterize their theory.
0
1
2
3
4
5
6
7
0%
20%
40%
60%
80%
100%
120%
1851
1902
1910
1924
1932
1946
1954
1962
1970
1978
1986
1994
2002
%
Stock Market Development and Shareholder Rights in
France (1852-2007) (Source: Shareholder protection: author's coding;
Stock market data: see appendix A)
Market Cap/GDP
Equity Issues/Investment
Shareholder protection (1sh=1v +Antidirector
rights)
24
market development do not appear to be positively correlated, contrary to the Legal Origins
predictions.
To confirm our graphical analysis, we regressed stock market development (defined as
market cap/GDP and equity issues/corporate investment) on shareholder protection and
securities law, along with relevant control variables (See appendix E for output):
Based on graphical analysis (trending), partial autocorrelations functions and formal testing
for unit root in all of our data series through Augmented Dickey Fuller tests (Appendix E-1),
it appears that most of our time series data exhibit non-stationarity. This characteristic
invalidates standard assumptions for asymptotic analysis. The time series should ideally
warrant Granger-causality or Hacker and Hatemi-J methods. In our case, the differencing our
time series (mostly first order) enabled us to ―stationarize‖ our data and to regress ―changes
on changes‖, except when dummy variables were used.
Shareholder protection was measured either as the LLSV/LLS indices (1 share/1 vote;
antidirector rights; Securities I Disclosure, Securities II Liability Standard and Securities law
III Public Enforcement indices) or as a dummy (1 for low investor protection from 1852-1933
and 1 for high investor protection from 1961-2007, i.e. above LLSV average of Civil Law
2.33 in their mid-1990‘s cross regression (1998)).
Appendix E-2 provides regression coefficient estimates of shareholder protection in relation
to market cap/GDP as the dependent variable, with ―controls‖ for log GDP/capita at constant
price (proxy for demand for finance), inflation rate (expected to be negatively correlated to
stock market per Bordo and Rousseau, 2007), corporate tax rate (tax shield benefits of debt
and capture of enterprise value by government), as well as a dummy for the nature of the
French social security/retirement system (pay-as-you go state funded after 1945-46 expected
to be negatively correlated with incentives to invest in equities for pensions; retirement and
healthcare left to households individual savings decisions pre-1945).
Appendix E-3 provides regression coefficient estimates of shareholder protection in relation
to equity issues/investment (the dependent variable), with notable ―controls‖ for yearly
changes in log GDP/capita, inflation rate, market timing (proxied by stock index, excluding
dividends to capture only capital gains), a very crude and incomplete proxy for the need for
external finance ((1-Retained Earnings)/Corporate investment, whose major caveat being that
it does not account for net working capital, tax and most critically listed vs unlisted firms43
),
corporate tax rate as well as a social security/retirement system dummy.
We were unable to control for critical factors such as variations in corporate sector share of
GDP, personal investor tax factors (relative personal tax on dividends, capital gains and
interest income), and relative protection of debt/bond holders vs equity holders. At a more
fundamental level, the theory testing exercise is limited by the low variability of investor
protection variables in our dataset.
Based on our analysis, shareholder protection (i.e shareholder rights and securities law) was
not positively correlated (at a statistically significant level) with stock market development in
43
Very crude proxy: Assumes somewhat unreasonably that listed firms have the same external finance need that
all firms of the economy. No detailed data on listed firm is yet fully available.
25
1852-2007.44
The hypothesized prediction of the Legal Origins theory that investor protection
be monotonically related to stock market development does not seem to hold in France.
Because the French case exhibits limited variance, we sought to compare our observation
with other countries for which there some, albeit limited, data available. Based on very
preliminary and very limited data on UK, Germany, Japan and France, investor protection (i.e.
shareholder rights and securities law) do not seem to be correlated (with stock market
development in our 1913-1999 cross-sections. (Figure 7)45
Figure 7: Antidirector Rights and Market Cap/GDP 1913-1999
- H2: Shareholder protection in Civil Law origins France was consistently weaker than
in Common Law origins Britain (Legal Origins=>Shareholder protection)
To test the second hypothesis implied by the Legal Origins theory, we have compared
investor protection in France with Britain in the first half of the 20th
century (data available).
Based on LLSV theory, we would indeed expect the higher level of investor protection in
common law countries in the 1990‘s to hold across time, at least for Britain and France,
which are the locus classicus of each legal family and are endowed with comparable levels of
economic development.46
As illustrated by Figure 8 below and Appendix D, investor protection was higher in France
than in Britain in 1867-1948 and 1967-1980 with respect to Antidirectors rights and in 1907-
1929 with respect to Securities Law.
We are unable to draw any statistical inferences on legal families based on such a low sample
and such limited controls. However, our preliminary data indicates that shareholder
45
To be confirmed by future research. 46
According to Toutain (1996), GDP per capita in Britain was only 12% higher than in France. (approx.31% for
Maddison (2001).
y = 0.047x + 0.5371R² = 0.016
0
0.5
1
1.5
2
2.5
0 1 2 3 4 5 6
Sto
ck M
ark
et/G
DP
Antidirector Rights
Antidirector Rights and Market/Cap GDP 1913-1999 in
France, UK, Germany and Japan. (Rights: Fr Author's coding (2009); UK (Franks et al.2005); Ger (Franks et al 2005);Jp
(Franks et al. 2009)) / Market Cap/GDP from Rajan and Zingales (2003) excl. France)
26
protection measured in terms of anti-director rights in Civil Law countries was not lower than
in Common law Britain in the first half of the 20th
century.
This preliminary evidence is difficult to reconcile with the LLSV thesis that Civil Law Legal
Origin, inherited in the 12th
(or 18th
) century, explains the subsequent lower levels of
shareholder protection for Civil law countries in comparison with Common law countries.
Figure 8: Antidirector rights in comparative perspective (1913-1938)
3.1.2 Substantive critique of the Legal Origins theory
Our time series analysis may cast some doubt about the ―time invariant‖ impact of legal
origins as a determinant of financial development. Consequently, it becomes critical to
complement our basic empirical analysis with a conceptual critique of Legal Origins, in the
French context. Three issues will be addressed:
- What is meant by ―Legal Origins‖? (i.e. common vs civil law distinction)
- Why does Legal Origins matter? (i.e. source of persistence)
- How does Legal Origins matter? (i.e. channels of influence)
3.1.2.1 What is meant by Legal Origins? The Civil Law/Common Law
distinction may not be relevant to investor protection laws
Proponents of the legal origins thesis postulate that legal origins as defined by the legal
family (notably common and civil law) are crucial in explaining financial development.
Drawing upon analysis of comparative law and history, we will suggest that the common vs
civil law distinction may not be of great relevance in explaining different levels of investor
protection.
We do not reject the notion of legal traditions across legal families (Civil and Common). We
do not also aim at refuting the possibility of path-dependence in legal origin. What we
critique is the use of Civil, Scandinavian, Germanic or Common categorizations of legal
origins by LLSV in support of their thesis on investor protection determinants. The
necessities of econometric analysis (i.e. coding of legal origins exogenous variable) have led
Country Legal Family
1913 1929 1938 1913 1929 1938 1913 1929 1938
US Common Low?; x ? ? ? N/A N/A N/A N/A N/A N/A
UK Common 1.00 1.00 1.00 0.00 0.67 0.67 0.00 0.33 0.33
France Civil-French 1.00 1.00 2.00 0.17 0.17 0.17 0.22 0.22 0.22
Brazil Civil-French 2.00 2.00 2.00 N/A N/A N/A N/A N/A N/A
Italy Civil-French 1? 1? 1? N/A N/A N/A N/A N/A N/A
Germany Civil-Germanic 1.00 1.00 1.00 0? 0? 0? 0.5? 0.5? 0.5?
Japan Civil-Germanic 1.00 1.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00
Avge Civil 1.17 1.17 1.50 N/A N/A N/A N/A N/A N/A
Avge French
Civil 1.33 1.33 1.67 N/A N/A N/A N/A N/A N/A
Shareholder rights
(Antidirectors + 1 sh/1v)
Securities Law I
(Disclosure)
Securities Law II (Liability
Standard)
Sources: US: Lamoureux et al. (2006); UK: Franks, Mayer, Rossi (2008)/ Rajan Zingales (2003); France: own author's calcul. (2009); Brazil:
Musacchio (2008)/ Goldshmidt (1985); Italy: Paganin & Volpin (2003)/Rajan Zingales (2003); Germany: Franks, Mayer and Wagner (2005) / Rajan
Zingales (2003); Japan: Franks, Mayer and Miyajima (2009)/Rajan Zingales (2003)
27
the authors to assume that legal systems are monolithic and internally consistent. In contrast,
we posit that investor protection laws did not appear to be historically determined by the
Civil/Common legal origin of the country in which they were enforced:
First, commercial and securities laws do not seem to embody the main characteristics of Civil
law and Common law ―ideal-types‖ highlighted by La Porta et al. (i.e. state employed judges,
greater reliance on legal and procedural codes, preference for state regulation over private
litigation for Civil law vs. independent judges and juries and weaker reliance on statutes for
Common law). Indeed, as pointed by Dam (2006, p.33) and Carbonnier (1992, p.148), most
modern laws governing shareholder protection and securities laws in common law countries,
especially from the late 20th
century (the time of the cross-sectional analysis from La Porta et
al.), were a result of statutory laws, not judge-made law (e.g. in US: Securities Act 1933,
Uniform code 1952, Sarbanes-Oxley 2001.in UK: FSA).47
Second, the concepts of ―legal traditions‖ and ―legal family‖ by no means imply that all
constituent laws are consistent with the characteristics of their ―legal family‖. In fact, legal
scholars acknowledge that commercial laws may not fit within the broader legal tradition that
influenced contracts, family or torts laws.48
According to Merryman, a leading American
comparative law scholar and the very source that the LLSV authors rely on to legitimate their
categorizations on legal tradition, ―microsystems of laws‖ have grown within legal system
(Merryman, 1985, p.152). They ―differ ideologically from the Code and in this sense are
incompatible with it‖ (Merryman, 1985, p.152). Merryman further illustrates his claim with
an analysis of the evolution of labour laws in civil law countries. He shows that ―whereas the
traditional civil codes left it to private individuals to pursue their own interest (…) the new
provisions embody policy choices and are designed to further specific social objectives.‖
(p.153). As a result, ―special legislation is heterogeneous, diverse and pluralistic, in contrast
to the formal and ideological coherence of the Civil Code.‖ (p.153).
We can extend Merryman‘s analysis of labour laws to investor protection laws. In France,
Civil codes prescriptions on contracts and ―civil‖ corporations were indeed superseded by
commercial codes that did not bear much philosophical resemblance to the 1804 Civil Code
and its Roman influences. Indeed, as emphasized by leading French legal scholars such as
Ripert (1912, 1981), Thaller (1898) and Carbonnier (1969; 2004, p.263), the very legal
characterization of the ―corporation‖, as considered by the doctrine, the legislator and the
courts in the late 19th
century, experienced radical changes. The corporation indeed evolved
from being considered a ―contract‖ (i.e. the Roman Civilist view) to being considered an
―institution‖ (i.e. a radically novel view).
Third, influences on commercial and securities laws in particular cannot be reduced to the
Common law/Civil law distinction made by LLSV. The French company law of 1867 was
explicitly influenced by the English joint-stock company act of 1855/56 while the SARL
(LLC) law of 1925 was a transplant of the Germanic law (Hilaire 1986). According to
Zweigert and Kötz (1998), Civil Law Brazil commercial code was principally derived from
the German legal code (1998, p.118). Mattei also shows that the Commercial Code of ―Civil-
Germanic‖ law Japan was mainly derived from US (Illinois) laws as a result of the American
occupation. (Mattei, 1997, cited in Dam, 2006, p.44). Another related point, which is
surprisingly absent from most of the literature, is that many elements of modern investor
protection and securities laws in the late 1980‘s-1990‘s are being influenced by European
48
This not surprising given that ―legal traditions‖ are didactic tools, not scientific categories.
28
Union legislation. EC/EU Directives are obviously not easily fitted within the
Common/Civil/Germanic/Scandinavian legal family categories. Hence, Civil law countries
were not necessarily regulated by ―Civil‖ law determined codes in commercial and financial
matters.
3.1.2.2 Why does Legal Origins matter? Questioning the persistence of legal
origins effects:
Refined proponents of the Legal Origins theory have attempted to explain the pervasiveness
of Legal Origins over time. Typically, these efforts take the form of analyses of historical
narratives of formative events at the Origins, whether it be a Coasian bargain between the
King and the landed aristocrats in 12th
-13th
century (Glaeser and Shleifer, 2002) or the liberal
revolutions in the 17th
-18th
centuries (La Porta et al, 2008) junctures. These original
conditions are deemed to have shaped and crystallized the essential characteristics of the
Civil/Common laws, which bear pervasive influence over time49
. The LLSV authors justified
the persistence of Legal Origins as follows: ―it is that system, as defined by Zweigert and
Kotz, (1998), with its codes, distinctive institutions, modes of thought and even ideologies,
that is very slow to change‖ and, later, ―It is this incorporation of beliefs and ideologies into
the legal and political infrastructure that enables legal origins to have such persistent
consequences for rules, regulations, and economic outcomes.‖ (La Porta et al, 2008).
While we agree that Law, and probably Legal Origins could matter, we do not share LLSV‘s
conjecture that crystallized Legal Origins are the crucial cause of variance of cross-national
investor protection/financial development today: Is ―the incorporation of beliefs and
ideologies in the legal and political infrastructure‖ 500 or 200 years ago so strong as to have
sustained political, economic and societal revolutions and shocks (e.g. end of feudalism,
secularization, rise and fall of liberal regimes, great depression, world wars, industrial
revolutions…)?
The analysis of persistence of Legal Origins would require a deep multifaceted analysis of
―Legal tradition‖ well beyond the scope of our work. Our more modest objective is to
question LLSV‘s assumptions, in light of what social science could teach us about
―persistence‖ phenomena:
First, from a historical perspective, even the core ideological and institutional characteristics
of the Legal Systems at Origins that were deemed to have ―crystallized‖ at origins according
to LLSV have in fact experienced significant change and even reversals:
Consider for example the evolution of the role of the judiciary, a critical ideological and
institutional difference that cut across the two legal families ―at origins‖ (and today)
according to La Porta et al. (2008) and Glaeser and Shleifer (2002). While courts are not
formal sources of law in Civil Law today, and were indeed acting as ―automata‖ of the
Legislature (Montesquieu: ―mouth of the law‖) during the French Revolution and early 19th
century, the French courts have asserted very strong interpretative powers in order to
complement the general and abstract principles of the Civil and Commercial Codes in the
course of the 19th
and 20th
centuries, in a stark deviation from Rousseau‘s and Robespierre‘s
original ―ideology and beliefs‖.
29
The far-reaching judicial interpretations of art.3, art.544 (Bayard 1915 case on ‘abuse of
law‘), art.1382 (Civil liability and compensation) and art.1134 (Contracts) of the Napoleonic
Codes are critical examples of the often understated importance of the judge in French law
(Carbonnier, 1992; Barrere et al., 2006). As Merryman (1996) puts it: ―What the judges
actually did, however, was build a body of law based to some extent on earlier French law,
nourished by French legal scholarship, but built largely through their own decisions.‖ Thus,
contrary to LLSV‘s persistence accounts, the role of the judiciary in France has been the
subject of radical change from its medieval/revolutionary Origins.
Second, if the ―incorporation of belief and ideologies‖ into a ―political and legal
infrastructure‖ suffice for the core characteristics of the law to persist, one may question why
other earlier legal systems endowed with some form of ideological consistency and
institutionalization elements such as medieval jus commune, canonical law or even, the
original Roman law, in its codified Justinian version, did not crystallize into La Porta‘s
―Legal Origins‖ variable.
Third, more fundamentally, La Porta et al.‗s claim that the mere existence of ―systems‖ and
―belief and ideologies‖ could in itself translate into persistence is difficult to reconcile with
theoretical developments on culture and institutions in economics, history and
sociology:50
Naturally, our point is not to highlight any social science scholarship that would
not substantiate the singular conception of persistence in La Porta et al. Rather, we argue that
even in the most ambitious observers and theorists of persistence in social science, we do not
find any claim that systems and ―beliefs and ideology‖ alone can sustain persistence:
Rational-choice economics and political science have emphasized the importance of
equilibria states to sustain institutional arrangements, resting on the absence of Pareto-
improving alternatives, not the mere existence of ideologies, systems and culture (however
important) alone, as suggested by ―LLSV‖. (e.g. Nash Equilibrium: Aoki, 2001); multiple
Equilibria models in increasing returns processes (Arthur, 1994); punctuated equilibrium
(Elredge, 1999)). Even so, equilibrium does not necessarily equate persistence: advanced
models emphasize how change is possible either through ―joint-belief‖ shifts (Aoki, 2001) or
the lack of congruence between de jure and de facto power in economic and political
institutions (Acemoglu and Johnson, 2005).
Similarly, the copernician revolution in historical science involving ―longue durée‖ and
structuralist concepts, led by the Braudel and the ―Annales School‖, has led to emphasize
persistence in the very long run through geographical and demographic ―infrastructures‖, not
the cultural ―superstructures‖ or mentalités. (Braudel, 1959)
Conversely, despite what some of its proponents claim, the Legal Origins view of persistence
is also at odds with the key insights of path-dependence. In our view, path-dependence is a
theory of change (bounded change but change nonetheless), not a theory of persistence. As
North puts it (1990, p.99) ―Path dependence is a way to narrow conceptually the choice set
and link decision making through time. It is not a story of inevitability in which the past
neatly predicts the future‖. We could indeed examine claims of path-dependence for Legal
Origins but this would contradict the very point made by La Porta et.al. According to their
50
It is important to note that our objective here is not to arbitrarily select theories that do not fit well with the
Legal Origins claim. This would be a vacuous epistemological exercise. Rather, we are aiming at showing that
even the strongest theories of persistence in social science do not fit with La Porta et al‘s claims. The problem is
that La Porta et al. fail to provide a ―new‖ theory that can explain their claim.
30
thesis, Legal Origins matter precisely because their core characteristics ―crystallized‖ at
origins through the effects of ―beliefs and ideologies‖ and system-like characteristics of the
law, not because they were the starting point of a bounded evolutionary process.
Overall, the critical argument behind the persistence of Legal Origins is far from being
unequivocal. Those authors may need to confront some of the evidence to better explain why
Legal origins could indeed persist over time and bear larger consequences than other
subsequent factors of changes in the history of financial systems.51
3.1.2.3 How does Legal Origins matter? Assessing the “Political” and the
“Adaptability” channels of influence
Later contributions from major proponents of the law and finance thesis (See e.g. Beck et al.
2003; La Porta et al, 2008; Glaeser and Shleifer., 2002) identified two channels through
which legal origins influence financial development: the Political Channel and the
Adaptability Channel.
3.1.2.3.1 Challenging the Political Channel of influence of the Legal
Origins:
According to the ―Political channel‖ view (See La Porta et al. 1999/2008, Beck et al., 2003,
Glaeser and Shleifer, 2002), ―legal traditions differ in terms of the priority they attach to
private property rights versus the rights of the State‖. (Beck et al., 2003). Under this view, the
civil law tradition tends to promote ―the development of institutions that advance State power
with adverse repercussions on financial development.‖ (Beck, et al. 2003). ―Civil legal
tradition, then, can be taken as a proxy for an intent to build institutions to further the power
of the State.‖ (La Porta et al., 2008). Financial development is restricted in ―Civil law‖
countries because of State rent-seeking opportunities that arise from the intrinsic
characteristics of the civil legal tradition, most notably constrained judicial independence and
discretion and lack of decentralized adjudication (juries) (Djankov et al. 2002).
Firstly, an independent and decentralized judiciary may not be the only nor the optimal venue
to constrain the State‘s ―Hobbesian‖ predatory inclinations. Constitutionally defined veto
players, separation of powers (e.g. bicameral institutions, judicial review) as well as
competitive electoral regimes can ―credibly commit‖ the State not to rent-seek. (North and
Weingast, 1989).
The theory would need to accommodate the fact that even common Law countries such as
US, Canada and Australia had to embed their property rights and checks and balance into
statutory constitutional rules, without solely relying on courts discretion, not to mention that
in most Common Law countries, the legislature can overrule judge-made law.
What‘s more, the judge-made law process is not necessarily immune from rent-seeking.
According to Coffee (2001), ―in the late nineteenth century, U.S. law was characterized by a
high level of judicial corruption.‖ Empirical research in Law and Economics shows that even
formally independent life-tenured judges in modern Common Law US could even be
significantly influenced through the strategic selection of cases settlements made by interest
51
The clear reference to cultural/ideology crystallization that we could envisage is 19th
century French
evolutionary anthropologists, later discredited by Levi Strauss and Durkheim.
31
groups (Cross, 2005).52
In the same way, in France, the venality and corruption of feudal
courts, that were in fact advancing the narrow political and economic interests of the landed
aristocracy at the expense of the King and his subjects, were a major determinant behind the
1789 revolutionaries‘ strict stance on judicial control (Merryman, 1996; Carbonnier, 1992,
p.235).
Even if LLSV do not make this argument to defend their thesis, one could still argue, on a
variation of Olson (1965), that the diffuse nature of court powers (i.e. multiple courts) would
reduce the influence of private interest group on their powers. On the other hand, should, for
some reason (e.g. cognitive shifts, endowment changes, exogenous shocks), a pro-equity
market majority arise, Civil Law may be better at implementing welfare-enhancing changes
in favour of minority shareholders through the power and decisiveness of the centralized state
law-making process and apparatus.53
Overall, La Porta et al. do not provide a theory to explain why the State would be necessarily
opposed to minority investor protection (a fortiori since it may be sometimes beneficial to the
government bureaucracy, the median voter or even the majority because of aggregate welfare
enhancement, financial development, higher economic growth and tax revenues)54
. They do
not explain how State rent seeking per se would differ from interest group rent-seeking (or
are the latter using the State to rent-seek?) or why a powerful and independent judiciary
would be immune from wielding its power in favour of corporate insiders and at the expense
of minority shareholders.
In effect, historical evidence suggests that the French inherited ―legal tradition‖ did not
prevent ―formally dependent‖ administrative and civil courts to demonstrate behavourial
independence from the executive and the State interests (e.g. development of judicial review
powers of the ―Contentieux‖ section of ―Conseil d‘Etat‖, ―Conseil d‘Etat‖ Canal ruling of
1962 against President de Gaulle at the apex of his power55
, Minit foto decision -
characterized as a ―jurisprudential Coup d‘Etat‖-, or the censure of retroactive laws by the
Civil supreme Court against the executive and legislative branches on 23/01/2004. See
Braibant et al., 2005; Merryman, 1996; Barriere et al., 2006). Likewise, decentralized juries,
a critical protection from the Sovereign for Glaeser/Shleifer (2002), have had for the most
time larger powers in France than in England or US in penal matters (Barriere et al., 2006)
while, in England, juries were in fact limited to defamation and fraud cases (David, 1985).
Thus, LLSV assumption that State power is intrinsically detrimental to investor protection is
conceptually controversial. Further, their characterization of the judiciary as a dependent
agent of the ―Leviathan‖ (Hobbes) in Civil Law France is not fully confirmed by detailed
historical observations. We may add that the direct involvement of the State in the economy,
measured as government expenditure/GDP, was not significantly higher in France than in the
UK in the first half of the century (Tanzi and Schuknecht, 2000).56
52
For instance, the New Deal statutory venue of reforms have been interpreted by many historians as a response
to interest group influence on the courts (Yarnold (1990) , cited in Cross (2005)) 53
See the role of State-led development in East Asia in the 1970/80‘s (Wade, 2003; Johnson, 1983); See also:
Rajan and Zingales (2003) 54
One can counterargue this claim by highlighting the existence of collective action dilemma (Olson, 1965). 55
The ―Contentieux‖ section of the Conseil d‘Etat grew over the 19th
and 20th
century as a de facto venue for
judicial review for acts of the executive or legislative. 56
1920: 28% vs 26%; 1945: 29% vs 30%.
32
3.1.2.3.2 Challenging the Adaptability Channel of influence of legal
origins
According to the ―adaptability channel‖ view (See La Porta et al., 2008), ―legal traditions
differ in their ability to evolve with changing conditions‖ and ―legal traditions that adapt
efficiently to minimize the gap between the contracting needs of the economy and the legal
system‘s capabilities will more effectively foster financial development than more rigid
systems‖ (Beck, et al. 2003). Proponents of the Legal origins thesis postulate that Civil law is
less ―adaptable‖ than Common law.
Fundamentally, the large reliance on statutory laws by both common law and civil law
countries for commercial matters weakens the ―adaptability‖ argument of La Porta et al,
especially since it is aimed at accounting for mid-1990‘s observations. (Unless one argues
that common law statutes were still impregnated by common law legal ―culture‖ and judge-
made law precedents.)
Furthermore, the ―Hayekian‖ claim that ―judge-made‖ law is more conducive to adaptability
of the legal system, by producing the most necessary and the best rules with the benefit of
individual cases57
is problematic. Research in Law and Economics (Kessler, 1996) shows
that factors such as asymmetric information between parties mean that the litigated cases may
in fact be a skewed and not a representative sample of real world disputes. Thus, even if the
common law were to set the most adaptable rules for the cases that came before courts,
nothing ensures that these marginal cases would govern optimally the broader cases to which
they will apply (as an ex-ante constraint to private behaviours). In addition, judge-made law
is constrained by the case evidence, which prevent them to consider wider economic
externalities that may arise from a specific case (Cross, 2005).
To summarize, our quantitative and conceptual analysis of the Legal Origins theory points
out to two key conclusions. Firstly, the theory fails to account adequately for the evolution of
investor protection and sock market development over time in France. Secondly, the
theoretical foundations that eventually sustain their claims with regards to the existence of
legal origins, their persistence and the superiority of its attributes, are not fully consistent
with historical evidences.58
57
Reference to information disadvantages of a central planner vs decentralized agent (Hayek,1960) 58
Theoretical indeterminacy.
33
3.2 Political Economy: Openess-driven Interest Group theory
The political economy ―interest group‖ thesis of Rajan and Zingales (2003) should yield the
following indirect testable implication:
- H1: For a given demand for external financing, stock market development is
positively correlated with high capital and trade openness.59
Figure 9: Openess and stock market development in France (1852-2007)
As highlighted in figure 9, on its own, the theory does not work very well to explain the
substantial increase in market cap/GDP in the 1920‘s and the delays in stock market
development from 1984-1990‘s, where the loci of political mobilization around
privatization/nationalization policies were likely to have outweighed any potential effects of
openness.
The theory in its strong form would need to emphasize the role of incumbent industrial
interests in the nationalization and privatization waves, which does not seem to sustain
detailed historical analysis. Indeed, (at least for nationalizations, that arouse from the 1944-46
as a grand bargain between Christian-democrats, Gaullist and Communists).
To refine our initial observation, we regressed stock market development on trade openness,
with differencing transformation to stationarize the data:
Across different specifications (See appendix E-4 for market cap/GDP as dependent variable
and appendix E-5 for equity issues/investment as dependent variable), we have notably
controlled for log GDP/Capita, inflation rates, a dummy for exogenous cross-border capital
mobility, based on the mean absolute level of Current Account to GDP in fourteen major
economies over the century (Taylor, 1998), interaction between demand for financing and
59
We cannot test for incumbent actions directly.
0%
20%
40%
60%
80%
100%
120%
18
51
18
90
19
06
19
12
19
24
19
30
19
36
19
48
19
54
19
60
19
66
19
72
19
78
19
84
19
90
19
96
20
02
% G
DP
Market Cap/GDP and Openess in France
(1852-2007) (1914-1918 and 1939-1945 excluded) (Sources: Villa 1993;
Bourguignon/LevyLeboyer, 1975; INSEE; Taylor, 1989)
Exogenous Cross-Border
Capital Mobility (1=high;
0=low)
Market Cap/GDP
Trade Openess
(Exports+Imports)/GDP
34
openness, and interaction between the latter and exogenous capital mobility, as well as a
dummy for the retirement system. We have also included the annual stock market index
(excluding dividends, i.e. gross capital gains/appreciation) for the equity issue/investment
indicator to capture market timing considerations, in line with empirical research from
Pagano et al. (1998).
Prima facie, changes in trade and capital openness in France did not appear to be positively
correlated (at a statistically significant level) with changes in stock market development over
the 1852-2007 period. In its strong and strictest form, the key prediction of Rajan and
Zingales‘(2003) theory -i.e. incumbents‘ weakened opposition in cases of both trade and
capital openness will be conducive to stock markets development- does not seem to
adequately account, on its own, for the evolution of stock market development in France over
time.
Nevertheless, our observations do not enable us to reject the theory in a weaker form.
Openness may well matter in a more subtle way which we cannot capture, by determining
gradual shifts in economic interests and structures that may not be immediately observable
due, for example, to the stickiness of political institutions in mediating interests or social
/cognitive inertia. In fact, parliamentary archives indicate that ―protection against foreign
ownership‖ was a recurring justification for lower shareholder rights, from the 1867 law
(Gazette 1867: driven by free trade with Britain) to the 1966 laws (Hemard, 1972, p.265).
3.3 Section 3: Summary
Our analysis suggests that Legal Origins theory does not appear to be able to account for the
difference of stock market development and shareholder protection when assessed from a
historical perspective. In addition, the Legal Origins common law/civil law distinction may
not be relevant to shareholder protection, and even if it were, the persistence and the benefits
flowing from Common Law Origins are not clearly established. In addition, openess-driven
interest group theories may not be able to account adequately for the evolution of shareholder
protection and stock market development in France.
What, then, can the idiosyncrasies of the French case teach us with regards to the
determinants of shareholder protection and stock market development?
35
4. SECTION IV: Discussion -- Preliminary lessons and questions
arising from the French case
4.1 Determinants of minority shareholder protection: discussion and tentative
inductive generalization
4.1.1 What determines laws governing shareholder protection? Preliminary
inferences from the French case
The first unequivocal implication arising from our analysis is that ―legal origin‖ is not an
appropriate explanatory variable for the laws governing minority shareholder protection.
A second implication that arises from the volatile historical evolution of shareholder
protection in France is that politics, broadly defined as the struggle among groups and
individuals mediated by political institutions, is undoubtedly a more suitable point of
departure to explain shareholder protection than ―structural‖ theories of financial
development, which rely on time-invariant explanatory variables such as culture or legal
origins.
4.1.2 When does formal minority shareholder protection matter? Distributional
effects of shareholder protection and relative efficiency of legal investor
protection
As shown in our analysis, the development of vibrant and deep equity markets from c.1890 to
c.1930 in France suggests that legal minority shareholder protection may not be a necessary
prerequisite for the development of stock markets. This does not imply that information
asymmetries or agency issues were not important at the time. One explanation put forward by
Franks et al. (2004) in their analysis of Britain could be that informal substitutes to formal
legal protection mechanisms, such as trust, may have reduced the risks and cost of
expropriation of minority shareholders by insiders. (cf. infra for considerations on the
determinants of stock market development).
We are not arguing that formal shareholder protection does not matter. On the contrary,
corporate governance regulation is one of many instruments that may be used by interest
groups to further their interest. Formal minority shareholder protection may matter to the
extent that other informal means of protection have become relatively less efficient.
This conjecture is of great importance for the research agenda in corporate governance.
Indeed, a large body of literature assumes that legal minority shareholder protection is a
critical intervening variable in explaining stock market development and dispersion of
ownership. Thus, refined political economy theories such as Roe‘s (2003), Gourevitch and
Shinn‘s (2005), Pagano and Volpin‘s (2005), and to a certain extent Rajan and Zingales‘
(2003), rest upon the unchallenged, sometimes implicit, assumption that formal investor
protection ultimately determines ownership patterns and the development of stock markets.
This approach has led the political economy research agenda in corporate governance to turn
its attention to the emergence and persistence of formal minority shareholder protection,
without due consideration to other structural determinants of stock market development and
informal substitutes to shareholder protection. This myopic focus on formal shareholder
protection determinants as a key intervening variable for financial development is one of the
36
reasons behind the inability of those theories to make sense of the history of financial
development in France.
Hence, we can expect laws and regulations governing shareholder protection to matter for
interest groups to the extent they are an efficient means to financial development or
repression (e.g. overcome the information asymmetries or externalities inherent in financial
markets, cf Section 1), or rent captures (i.e. maximize private interests). If indeed formal
shareholder protection may not be the most efficient means to financial
development/repression, why would rational interest groups or the State allocate finite
political or economic capital to an inefficient, or suboptimal, means (formal shareholder
protection) to their ends (e.g. raise capital at a lower price for investors, limit outsiders
protections for managers and majority shareholders, minimize expropriation risk for
outsiders…)?
Obviously, as illustrated by the collapse of the Cartel des Gauches government in 1926 on the
issue of capital taxation, interest groups and preferences (in this instance: investors and
financiers aptly named by center-left prime minister Herriot ―le mur de l‘argent‖60
) did exert
significant influence in shaping corporate and economic laws and regulations. But we can
speculate that when workers, owners and investors have other higher priority preferences, the
lawmaking process defining shareholder protection may not have been the subject of intense
interest groups struggles and influence.61
This remark in turn calls for more refined political economy theories that incorporate a
―resource based‖ view of actors to better model how actors allocate their finite economic and
political resources to achieve competing objectives.
4.1.3 Beyond the principal-agent relationship: the embeddedness of shareholder
protection
The relative efficiency of shareholder protection instruments (formal vs informal, private
bonding vs laws) is likely to be conditioned by the deeper social, political and economic
structures in which they are embedded. In particular, a pre-existing set of economic and
social institutions may impact substantially the efficiency of formal protection.
Finance research tends to consider corporate governance issues from a principal-agent
relationship and, accordingly, focuses on minority shareholders and managers/controlling
shareholders.62
Beyond the effects of the polity in determining investor protection regime, we
need to consider the importance of the broader institutional arrangements in which investor
protection is nested. Obviously, market-funded pension systems are critical factors in the
development of a constituency for higher shareholder protection and financial development.
The self-reinforcing effect of market-funded pension systems could not occur in France due
to the emergence of a comprehensive public social security system following the Second
60
The literal translation of ‖le mur de l‘argent‖ would be ―the wall of money‖. 61
As a matter of fact, our partial analysis of parliamentary records during the discussion of the 1880‘s-1900‘s
company law and laws governing protection of shareholders may have been left to largely technical
commissions and committees, mainly driven by legal scholars and motivated by technico-legal and, sometimes
moral, reasons. Further research could identify the extent to which political debates on investors rights were not
dominated by economic interests and considerations. 62
We may also re-consider the ―completeness‖ of labour contracts, which may broaden the debate on corporate
governance.
37
World War. More generally, ―Varieties of Capitalism‖ (Hall and Soskice, 2001) or
―Régulation‖ theories (See Boyer and Saillard, 2002) documented the existence of mutually
reinforcing complementarities within different economic systems (Coordinated vs Liberal for
the VOC theorists), notably in price and wage setting mechanisms, financial structures
(―patient capital‖), labour relationships and education systems. (Hall and Soskice, 2001).
Hence, an important agenda for future research is to better understand the determinants of the
relative efficiency, and therefore the preferences of interest groups/the State63
with respect to
competing mechanisms of investor protection (and or rent captures). A related research
agenda could consider why and how substitute forms of investor protection can become less
prevalent. Furthermore, we need a better understanding of the way institutional
complementarities arising from the linkages of shareholder protection with an existing set of
economic and social institutions can impact shareholder protection and its relevance.
Improved understandings of these issues are needed before a superior political economy
theory of corporate governance regulation can be proposed.
4.2 Determinants of Stock market development: idiosyncracies of the French
case and venues for future research
4.2.1 Idiosyncrasies of the French case: preliminaries inferences on the ―great
reversals‖ in French stock market development (1944-46 and c.1985)
Our time series data suggest that the development of French stock markets have experienced
dramatic reversals at two critical junctures: the immediate post-war period64
and the mid-
1980‘s. How can we explain these reversals? What were the key factors that shaped the
policies and laws that inhibited (1944-1946) or promoted (c.1985) stock market development?
The generalisable value of the French case with regards to our understanding of structural
determinants of stock market development is limited. Indeed, one critical determinant of
stock market development in France appears to be the direct, conscious and contingent
actions of the State. Nationalizations (1936, 1945-46, 1981-1982) and, conversely,
privatizations (1986-1987; 1993-2002) were crucial obstacles and factors behind the
development of equity markets in France in the 20th
century:
Firstly, as indicated earlier, nationalizations directly reduced market capitalization levels
substantially in 193665
, by 36% in 1944-46 (at 1938 valuations)66
and by 17% in 198267
(Vessilier, 1983; Bozio, 2002). Privatizations in 1986-87 and 1993-2002 gradually restored a
significant proportion of these firms to the public markets. (See for example Biais and Perotti,
2002).
64
We could have included the late 1930‘s but most countries experienced a similar decrease in stock market
development during the great depression. 65
1936: nationalizations: railroads and armaments industries. (Vessilier,1983) 66
1944-46 nationalizations: Bank of France central bank, the fourth largest banks and the largest insurers, coal,
gas and electricity, air and maritime transport industries and a significant portion of the automobile and
aeronautics industries : Houillères du Nord et du Pas-de-Calais (Dec 1944), Renault (Jan 1945), Gnome and
Rhône (May 1945), air industry (Jun 1945), Banks (Dec 1945). (Vessilier, 1983) 67
The 1981-82 nationalizations include 12 large industrial conglomerates and 39 commercial and investment
banks. (Vessilier, 1983)
38
Secondly, the nationalized financial and industrial sector created a powerful constituency in
the economy and the polity that made access to external finance and the competitive positions
of challengers and new entrants very costly from the 1950‘s to the mid 1980‘s period.68
Thirdly, privatizations, beyond their direct impact, can improve stock market valuations by
reducing the political risk related to commitment to market-oriented policies. (Perotti and
Von Oijien, 1999).
4.2.2 Towards a more systematic account of ―great reversals‖
Given the importance of nationalization and privatization events for the development of stock
markets in France over the second half of the 20th
century, it has become critical to better
understand the ultimate determinant of these policies in the context of financial development
theories:
We argue that privatizations/nationalizations episodes in France are not easily amenable to
structural claims by dominant financial development theories that regard the law/legal
origin69
(La Porta et al. 1997) or the openness of the economy (Rajan and Zingales, 2003) as
key drivers of financial development. In fact, Attlee‘s government in post-war Common law
Britain also nationalized a portion of the British industry, albeit on a smaller scale and
duration than in France. Furthermore, the large 1982 nationalizations in France occurred in a
context of high capital and trade openness (exports and Imports at 46% of GDP in 198170
).
On the other hand, focus on partisan left-right struggles as drivers, such as Roe‘s theory
(2003), insufficiently account for nationalization/privatization policies. In effect,
privatizations, driven largely by the objective to reduce increasing government and social
security public debts, continued under Jospin‘s left governments in 1997-2002.71
More generally, nationalizations and privatizations processes need to be considered within a
broader set of economic institutions, economic policies and accumulation regimes that
emerged during these critical junctures of 1944-46 and the mid-1980‘s. The 1944-46 juncture
witnessed the rise of a ―Statist‖ “dirigiste” economic system with the State acting as the
―visible hand‖ of the market in industrial, labour, financial and macroeconomic matters. The
mid-1980‘s were characterized by the rise of stock market development and economic and
68
This point is all the more relevant given the nationalizations of key financial institutions in 1945-46 and in
1981-82. In addition, public sector financing needs crowded new entrants financing: until the mid-1980‘s,
restricted access to foreign capital could not compensate for the limited availability of domestic savings for new
entrants/challengers. Besides, beyond the limited access to finance, most managers in powerful SOE‘s were
previous members of the technocratic or political elite who had usually served in the French higher
administration and/or governments before being appointed. The close social, personal and cognitive ties of the
management of SOE with the policymakers made them more likely to be heard by policymakers than private
sectors challengers or new entrants. 69
Another interesting consideration with respect to the State rent seeking orientation assumed by the Legal
Origins theorist : the government did not appear to seek to expropriate or fail to compensate equity holders at
―fair‖ values, at least for periods where market values were easily observable (i.e. 1982) (See Vessilier, 1983 for
details of compensation for shareholders of nationalized firms). 70
1852-2007 mean of trade openness = 30% as per our reconstructed data. 71
The argument that privatization helps to raise cash for the government is related to the privatization‘s impact
on productivity. If the public ownership is optimal, then government‘s best option is to maintain the firms in
public ownership and receive the stream of free cash flows. If the government has liquidity issues, it should
issue debt (or raise taxes). The privatization proceeds are high only when the new private owners are more
efficient (or at least expect to be more efficient).
39
financial liberalization. As highlighted earlier, notably because of increasing returns, path-
dependency and institutional complementarities that arise from a pre-existing and/or
combined set of economic institutions, the determinants of financial development may only
be fully captured if we consider the broader political economy of the ―social system of
production‖72
in which financial systems are embedded.
4.2.2.1 1944-46 critical juncture: preliminary inferences
The emergence of the ―dirigiste‖ Statist economic institutions in the post war era, together
with the nationalization policies, which resulted in a significant decline in the role of equity
markets as a source of corporate financing in the 1945-80‘s period, cannot be apprehended
without reference to the impact of the second world war.
At the end of the war, a large portion of capital owners and bourgeois elites were discredited
by their active collaboration with the Vichy government. Conversely, active participation in
the Resistance, to a large extent unified under De Gaulle by 1944, became the new source of
legitimacy (if not of legality; see Hamon, 1984). In effect, Communists and Gaullists played
a pivotal role in the Resistance movements, which translated into large representation and
influence in the provisional government of the French republic (1944-46), which initiated the
French “dirigiste‖ model (nationalizations, the creation of the Plan and the welfare system).
As pointed by Asselain (1983), nationalizations were agreed upon consensually in 1944 as
part of the National Resistance Council programme (which directed the provisional
government policies) across Christian democrats, Gaullists and Communists without
significant interference from capital-owners and with widespread popular support in 1945.
(See also Mayeur, 1984, p.92 and Margairaz, 1991, p.807-844).73
Further political economy research should enable us to analyse rigorously how these dramatic
shifts in political legitimacies resonated with more fundamental structural changes in
endowments and preferences of various classes (notably capital-owners, workers,
bureaucrats).
One hypothesis could be that a cross-class coalition between a middle class of workers (less
invested in financial assets) and an elite group of bureaucrats could have been a key driver
behind the Statist ―dirigiste” configuration of the French economic policies in 1944-46 and
the lack of development of stock markets in the subsequent periods.
In particular, the dramatic reduction in financial assets relative to the ―human‖ capital held by
the middle class (i.e. non inflation-indexed instruments, typically government bonds and
stocks) may have meant the ―median voter‖ had a preference for corporatist policies and
corporate governance rules protective of labour rents.74
We can speculate that the State was
the most efficient route to increase labour rents for the middle class due to the traditional
weakness and ideological and political radicalism of organized labour in France. In addition,
72
We borrow the concept ―Social system of production‖ from Hollingworth and Boyer (1997). 73
Discussion of the determinants of the persistence, rather than the mere emergence, of the State-led economic
system in France is beyond the scope of our analysis. It is highly probable that the lack of shareholders and the
implicit coalition of workers, State bureaucrats and managers prevented the rise of a constituency for
shareholder protection and stock market development. 74
The middle class was pivotal because a large share of the political preferences were polarized. The
Communists enjoyed around 30% of the popular vote in the immediate aftermath of World War II. (See Mayeur,
1984 for example)
40
contrary to financial capital returns, the returns on ―human capital‖ cannot be fully diversified
or insured (Perotti and Von Thadden, 2003). Such ―incompleteness‖ of human capital
markets could have translated into a lower risk tolerance for the agents with relatively higher
human capital endowments and firm-specific human capital investments. The importance of
non-diversifiable human capital assets and related firm-specific investments could have led
the ―median voter‖ to favour State-controlled governance, which is more likely to reduce
corporate risk taking than shareholder dominated governance systems, as well as more
intense State-led insurance and redistribution schemes (to be confirmed by future research).
4.2.2.2 Mid-1980‟s critical juncture: preliminary inferences
Understanding the determinants of the mid-1980‘s critical juncture financial development and
privatizations policies in France is an arduous task due to the complexities inherent in
institutional change and dynamics.
Preliminary evidence suggests that political preference for France‘s European Community
commitments over the preservation of the ―dirigiste‖ model was the proximate cause for the
dramatic 1983 shift in Mitterrand‘s economic policies towards liberalization, higher
shareholder protection and stock market development (Levy et al., 2006; Loriaux, 1997; Hall,
1986).75
It is true that the state-led ―dirigiste” approach to economic and industrial policy had become
less efficient once postwar reconstruction and catch-up à la Solow was achieved (Cohen,
1989).76
Moreover, Mitterrand‘s Socialist policies in a context of adverse global
macroeconomic conditions had led to high inflation levels and increased public debt in 1981-
1983. In particular, it is highly probable that the government growing need to finance its
growing fiscal deficits and debt had led policymakers to acknowledge the need to develop
liquid domestic financial markets. Similarly, government and social security debt financing
was a key rationale in the privatizations drives of 1986-1988 and 1993-2002 (O‘Sullivan,
2007). Nevertheless, as highlighted by numerous authors (Levy et al. 2006; Hall 1986;
Cameron 1996; Favier and Martin-Roland 1996, Attali, 2005), the alternative to the 1983
―tournant de la rigueur‖ (i.e. devaluation, exchange controls, and continuation of Statist and
Socialist policies and arguably ―financial repression‖) was strongly contemplated by
Mitterrand, who had a largely unconstrained and swift decision making power under the
French majoritarian ―semi-presidentialist‖77
institutions.78
In effect, the 1983 policy shift, a plausible immediate determinant of the ―great reversal‖ in
stock market development in the mid-1980‘s, can be characterized as an eminently political
decision, driven by the balancing of broader ideological considerations (i.e. French European
commitment versus domestic socialism), and made possible by the ―majoritarian‖ nature of
75
As highlighted by Levy et al. (2006), ―President Mitterrand was forced to choose, therefore, between
France‘s traditional statist growth strategy and European solidarity. His advisors were divided into two basic
camps. (…) After much agonizing, Mitterrand opted for the latter camp, and the process of “dirigiste” rollback
began.‖ 76
In shipbuilding, for example, it was estimated that each job paying 100,000 francs in annual wages cost the
government 150,000 to 450,000 francs in subsidies (Cohen, 1989. p. 230-231, cited in Levy et al., 2006) 77
See Duverger, 1971 for the concept of ―Semi-presidentialism‖ in Constitutional Law (5th
Republic regime). 78
This is another example of the importance to consider independent effects of political institutions in
conjunction with the endowments and preferences of interest groups and society in shaping policy.
41
the Fifth Republic (See Lijphardt for a classical typology of political systems, 1999; See
Pagano and Volpin, 2005, for a thorough review of the impact of political institutions).
Our macro-level approach to the explanation of the great reversals is not to deny the
independent role of micro actors (i.e. managers of large Cac-40 French firms) who played a
subsequent key role in the development of French financial markets in the late 1980‘s and
1990‘s, through their secondary equity issuances and their autonomous decisions to unravel
the previous cross-shareholding networks between large French firms and financial
institutions (Culpepper, 2005). These managerial behaviours were driven by the need for
scale and the pursuit of aggressive non-organic growth strategies in increasingly competitive
product markets (O‘Sullivan, 2007). Yet, we argue that the subsequent stock market
development of the 1990‘s could not have occurred without the prior policy shift of the mid-
1980‘s. Thus, further research is needed to identify the extent to which the 1983 critical
juncture was a political decision driven by ideological considerations rather than a mere
manifestation of the growing (unsustainable?) inefficiencies of the Socialist and Statist
economic policies in an open economy, in place since 1981 and the postwar period
respectively.79
In sum, our preliminary inferences (to be confirmed by future research) suggest that the
―great reversals‖ of French stock market development in 1944-46 and the mid-1980‘s may
have been ultimately determined by politics, as mediated through political institutions (1944-
46 juncture: cross-class coalition of workers and bureaucrats against investors Mid-1980‘s
juncture: commitment to European project under majoritarian political institutions), rather
than by time invariant structural determinants proposed by leading financial development
theorists (e.g. openness or legal origins).
4.2.3 Potential generalizations arising the French case: the development of the
stock market in the absence of formal investor protection (1852-c.1930)
As mentioned earlier, the generalizable value of the French case in the post-war era is limited
since contingent political events, arising on the back of the exceptional shock of the war and
ideological considerations, seem have been the key factors behind the 1944-46 and mid-
1980‘s ―great reversals‖ of financial development policies in France.
Nevertheless, the 1852 to 1930 period, where private ordering and market mechanisms were
reasonably unconstrained, may provide us with potentially universal lessons on the
determinants of financial development.
The French case provides preliminary indications that legal protection and openness alone
may not determine financial development. This leads to a puzzle: how then can we explain
the development of stock markets in the late 19th
century and early 20th
century in France?
79
The study of the determinants of stock market development and shareholder protection in the late 1980‘s and
1990‘s in the literature may not be as good a focal point as the analysis of the earlier great reversals of the mid-
1980‘s (1983 macroeconomic shift and 1980‘s privatizations). Indeed, it is likely that the privatizations and
stock market development arising from the mid-1980‘s great reversals subsequently created a constituency of
shareholders, who in turn promoted shareholder protection and policies favorable to stock market development.
O‘Sullivan (2007) and Culpepper (2005) in particular emphasize the importance of managerial autonomy in
deepening change in the late 1990‘s with cognitive shifts in the managerial class and the need for external
capital for French large firms in order to fund overseas acquisition and scale in increasingly competitive product
markets.
42
Notwithstanding the lack of data, a few venues for future research can be identified:
Contrary to these predictions, anecdotal evidence suggests that block-holding in the largest
listed firms did not occur in France in the earlier century despite the absence of formal
protection. (Cf section 2). Moreover, French households invested heavily in equities. In this
context, the key issue is to understand whether or not firms were actually constrained or
priced-out for capital ex ante.
A promising source of research may be to try to estimate the increased returns required by
dispersed shareholders to compensate for agency costs and information asymmetries. For
example, Hautcoeur (1994) notes that diffusely owned Railroads (approximately 35% of
capitalization in 1880-1914) did not elicit to make use of the optional government guarantee
on dividends80
(Viller, 1955,p.185 cited in Hautcoeur, 1994). At least, we may infer that the
incremental tax cost brought about by this guarantee81
was higher that the increase in
expected return required by dispersed investors who face information asymmetries/agency
risks/costs.
If indeed future research confirms that ownership concentration did not occur, the first
category of potential explanations could be that other substitutes to legal shareholder
protection partially mitigated the twin problems of information asymmetries and incomplete
contract that allow managers‘ shirking and expropriation.
Trust may be a plausible source of protection (See Mayer 2008). The building of trust in
France may have been more difficult than in the UK. Indeed, while presumably shareholders
were geographically dispersed (40% of households owning stock in 1913), the board of
directors and the stock exchange listing of large firms, with the notable exception of mining,
were disproportionately located in Paris (85% of market capitalization excluding mining in
Paris Bourse).82
Short of trust, maybe reputation could also account for the dispersion of large firms, who are
more likely to return to the market for external financing, in contrast with the medium-size
industrial firms, whose capital raising is mostly ―sunk‖. With regards to dividend, aggregate
yields in most advanced economies (as highlighted in appendix F, at a macro level, i.e. not
controlling, inter alia, for dramatic changes in tax regimes and industry-composition of stock
markets) were not higher in the early 1900‘s than later in the century (Dimson et al., 2002).
Further research at a microeconomic level is needed to measure the long-term micro-
evolution of dividend yields. This will the extent to which dividend payout behaviors could
be a result of the lack of formal investor protection (i.e. minority shareholders unable to
extract dividend payments from insiders), as predicted by the ―outcome‖ agency model of La
Porta et al. (2000) rather than a substitute for effective legal protection as predicted by
classical agency theory (i.e. firms committing to higher payouts to limit the cash in the hand
of insiders and commit to future equity issues in the future with outsiders.).
Another substitute to formal protection could be that intermediaries surmounted the collective
action dilemma of dispersed minority shareholders, by using proxies to actively control
80
Only the cash-constrained Orleans Railroad apparently made use of the guarantee. (Haucoeur, 1994). 81
Source not triangulated (Viller, 1955 briefly cited in Hautcoeur, 1994). To be confirmed. The authors
mentions 32% increase on tax on dividends. 82
Future venue for research: evidence on the absence of price discrimination in takeovers and retention of
directors of target boards in merged firms could be also operational indicators of trust. (See Franks et al., 2006 )
43
directors. The very limited evidence indicates that French banks, unlike their German
counterparts (Franks et al. 2006), did not play such an active role in the management of large
firms. (Bouvier, 1970).
Alternatively, one may address the stock market development question through the investor‘s
portfolio perspective, not the firm‘s perspective. The increase in age expectancy, in revenue
per capita combined with the absence of State retirement and extensive welfare provisions
from the Government in the 1850‘s-1930‘s period provided strong incentives to save and
invest for French households.83
It may well be that in relative terms, even though the risk,
hence required return on stocks, were higher in the absence of strong legal protection, the
portfolio allocation to domestic stock made sense from a diversified portfolio perspective
maybe because of the lack of attractive risk-adjusted return alternatives. Indeed, empirical
evidence suggest that inflation may not have been correctly anticipated in bonds in the period,
resulting in long periods of negative ex post bond returns (negative ex-post real returns)84
.
The documented French capital outflows towards foreign securities, notably Russian bonds
before 1917 (Hautcoeur and Le Bris, 2008), may indicate that investors were not only looking
for diversification benefits (lower shareholder protection but presumably low correlation of
Russian equity returns with their French portfolio returns) but also for higher real yields. In
this perspective, it would be interesting to compare the optimal diversified portfolio
allocation to French equities with the actual allocation in 1890-1913.
Conclusion
Our analysis indicates that formal investor protection was not a crucial determinant of stock
market development in France from 1852 to 2007. In addition, beyond the conceptual
shortcomings of the Law and Finance theories, it appears that ―Legal Origins‖ cannot account
consistently for the differences in levels of shareholder protection in civil law France and
common law countries in the 20th
century. Finally, the evidence provided suggests that capital
and trade openness alone was not a significant factor in the development of French equity
markets in the late 19th and 20th
century.
Rather, a political explanation which incorporates the preferences of social classes and
interest groups with respect to the distributional impact of shareholder protection, the distinct
impact of political institutions and political actors, as well as the pre-existing or concomitant
complementarities of economic institutions, may be a better option in explaining the great
reversals that characterized the evolution of stock markets in France (1944-46 and mid
1980‘s). In particular, we hypothesize that the political, economic and social consequences of
the Second World War provided impetus for a “dirigiste” economic system where the role of
stock markets was marginalized. We also suggest that the gradual changes in the “dirigiste”
economic system and economic policies in the mid 1980‘s, which indirectly laid foundations
for future developments of equity markets in France, were primarily driven by broader
political and ideological considerations rather than by economic intentions or interest group
influences (to be confirmed by future research)85
.
83
No public pension system at the time. 84
Ex ante is not available but widespread negative ex-post returns on bonds suggest inflation was not adequately
anticipated by investors at the time. 85
Identifying whether political and ideological decisions were determined by economic variables is critical to
sustain this claim (future research).
44
With this perspective, two distinct directions for future research could further deepen our
understanding of the French case, with significant implications for corporate finance theory
and economic policy.
First, future empirical research is needed to explain the development of stock markets in the
absence of formal investor protection in France. The macro focus of our historical analysis
and the absence of shareholding ownership firm-level data did not enable us to address this
critical question. It would be of particular interest to examine the extent to which firms were
actually constrained for capital in the earlier century, and confirm the existence of functional
substitutes for formal investor protection in this period. This would require a thorough micro-
economic firm level analysis of financing decision and the collection of detailed ownership
patterns of French public firms in the 1880-1960 period.
Second, further research is required to provide a more rigorous understanding of institutional
emergence and change in corporate governance and economic institutions. As emphasized in
our study of the French case, a superior explanation of shareholder protection determinants
and stock market development cannot restrict itself to the isolated study of financial contracts
and relationships. Potential institutional complementarities and increasing returns processes
among economic institutions condition the impact and efficiency of corporate governance
institutions and investor protection. This raises questions about purely functionalist and
rational-instrumental interpretations of corporate governance institutional emergence and
design (i.e. the emergence and design of institutions explained by the dominant actors‘
objectives they serve).86
Moreover, our understanding of the evolution of corporate
governance and financial markets may necessitate a more subtle holistic theory of
exogenously and endogenously-generated institutional change, that perhaps, apart from
Marx‘s immense contribution, has eluded social science.
86
A substantial question is to understand the genesis of complementary and internally congruent institutions, for
which accounts relying on a grand design by a provident actor are not plausible.
45
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Zingales, L., 1995, Insider Ownership and the Decision to Go Public. Review of Economic
Studies, 62(3), pp. 425-48.
Zweigert, K., Kötz, H., 1998. Introduction to Comparative Law. New York, NY: Oxford
University Press.
Internet databases/data sources
www.insee.fr
www.euronext.fr
www.cepii.fr / http://www.cepii.fr/francgraph/bdd/villa/mode.htm
www.banque-france.fr
www.oecd.com
www.imf.org
www.legifrance.fr
52
APPENDIX
APPENDIX A: Key variables description and sources
A-1 Table 1: Stock Market Development and Key Macroeconomic variables:
Key Variables Source
(I) Stock Market Development
Market Cap/GDP
(i) Market Cap: 1852-1900: Arbulu (1998); 1900-2001 (Bozio,
2002); 2002-2007 (Euronext, 2009). (ii) GDP: Source: 1871-1890
Nominal Growth rates GDP from Levy-Leboyer and Bourguignon
(1985) applied to Nominal GDP 1890 Villa (1993) to overcome
substantial difference in GDP estimates between 19thc/20th century.
1890-1949 P.Villa (1993); 1949-2007: source INSEE comptes et
indicateurs economiques + www.insee.fr. (Pre 1960 fitted to New
Francs 1960 nominal)
Equity issues/Corporate Gross Fixed Capital Formation
(i) Equity Issues: 1892-1907: Credit Lyonnais Statistics modified by
Hautcoeur (1994), 1907-1936: SGF corrected by Hautcoeur
(1994), 1936-1939: Credit Lyonnais in Sauvy (1984); 1967-1971:
Dubarle, Mouchotte (1973); 1950/60 Rajan and Zingales (ten year
data points as % of GDP, retro calculated), 1974-2007 Paris
Bourse/Euronext annual reports. (ii) Corporate Gross Fixed Capital
Formation: 1890-1949 : Villa (1993); 1949-2007: INSEE
Domestic Market Capitalization of Regional and Paris exchanges/Current
Nominal GDP
French Stock Market Equity issues (IPO or Seasoned equity offerings) by
French Listed firms/Domestic Corporate Gross Fixed Capital Formation
(Listed and non listed firms: macroeconomic aggregates)
Description/Comments
Key Variables
(iii) Control Economic and Financial variables
Log GDP/Capita Constant Francs 1995
Inflation rate
External Finance need as a % of expost Investment (1- (Retained
Earnings/Corporate Investment) Crude Proxy
Corporate Tax Rate %
Openess (X+M)/GDP Nouveaux FF
Exogenous Capital Mobility (0 = low capital mobility when C/A GDP
below 2%; or 1=high capital mobility when C/A >above 2% dummy)
Stock Market Price Index Annual REAL Return (Capital Gains only,
excl.Dividends, inflation adj.)
Dividend Yield
Dummy Retirement system (1 if no State retirement pay-as-you-go
basis (Repartition), 0 if pay-as-you go State retirement system )
Dummy for lower investor protection (1852-1933)
Dummy for higher investor protection (1962-2007)
SourceDescription/Comments
Logarithm of GDP per Capita valued at French Francs 1995. A proxy for
demand for finance.
Domestic French CPI .
This is the "Taux d'Autofinancement" as per INSEE typology with "Gross
Savings/FBCF": It is equivalent to (Net Income - Annual Dividends +
Depreciation/Amortizations)/Gross Fixed Capital Formation. Very crude and
unsatisfactory proxy for the following reasons: (i) Accounting measure, not
cash flow since it excludes working capital variations. (ideally, Cash Flow
before Capex) (ii) Ex post investment is determined by available internal
finance given imperfection of financial markets. (See e.g. pecking order
theory) (endogeneity problem) (iii) Mixes operating and financing policy of
the firm by substracting dividends and interests. (iv) Critically: only aggregate
data from all French firms: assumes that the internal financing and investment
patterns are the same for listed and non listed. Yet, it is likely that listed
firms are subject to selection bias (Bias in firms going public), and hence are
not representative of all the firms in the economy.
Mean historical absolute value of current account over GDP over five year
intervals for a sample of fourteen developed countries for 20th century as
calculated by Taylor (1998). We presume the existence of "exogenous"
capital mobility when the average Current Account to GDP of major world
economies is above 2%.
Sum of Export and Import current Francs/ GDP current Francs
Corporate Tax Rate %. Data N/A to adjust for the net impact of taxation on
financing decisions of firms by considering personal investor taxation. (div vs
capital gains, double tax credits…)
Stock Market Real (inflation-adjusted) Price Index CAC40 (top 40
corporates in French Stock Exchanges), i.e. excluding dividends returns.
Annual Dividend yields for CAC40 listed companies in the French exchanges.
Dummy to capture the availibility of a comprehensive State
Pension/Retirement scheme.
Dummy to capture investor protection (Shareholder rights and securities law)
when Shareholder rights are above 2.63, i.e. average World Antidirector
rights as per LLSV (1998).
Dummy to capture investor protection when Shareholder rights are below
2.63, i.e. average World Antidirector rights as per LLSV (1998).
1852-1900 Levy-Leboyer and Bourguigon (1985); 1900-2001 Piketty (2001);
2001-2007 INSEE.
1850-1990 Toutain (1997); INSEE (2009)
Pre-1973 corporate tax rates: Hautcoeur (1994); Levasseur and Olivaux (1981)
Source: Levy Leboyer and Bourguignon (1985), A.Sauvy and Annuaire statistique
INSEE from 1949-2007
Taylor (1998). IMF for 1998-2007 data
Source: 1890-1896: Carre Malinvaux (1972) p.424 ; 1896-1949 Villa; Hautcoeur
(1999)"L‘autofinancement : théorie, questions de méthode
et tentative de cadrage macroéconomique; 1949-2007 INSEE
pour la France (1914-1990)", Entreprises et Histoire, n°22, oct. 1999, 55-77 for
confirmation of pre 1914 estimates and 1918-1929 estimates. 1930-1938: P.Villa
(1993) Productivité et accumulation du capital en France depuis 1896, OFCE,
INSEE for 1949-2007 estimates
53
A-2 Table 2: Shareholder Protection
Key Variables Source
(II) Investor Protection Indicators definition as per La Porta et al. (1997, 1998, 2004)
II.1 Shareholder Rights
Shareholder Rights (Antidirector rights Index+1 Share = 1 vote)
France (1852-2007)Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
1 Share 1 Vote Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Antidirector Rights Index (aggregate) Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Proxy by mail Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Shares not blocked before meeting Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Cumulative voting or proportional representation Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Oppressed minorities mechanism Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Preemptive rights for sh (vote) to prevent dilution Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
% of share capital to call EGM at 10% Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Description/Comments
Equals one when the Company Law or Commercial Code grants
shareholders the first
opportunity to buy new issues of stock and this right can only be waved by a
shareholders‘
vote, and zero otherwise.
It is the minimum percentage of ownership of share capital that entitles a
shareholder to call
for an Extraordinary Shareholders‘ Meeting. It ranges from one to 33
percent.
Aggregate index sum of (1 Share 1 Vote and Antidirectors-rights aggregate
index): from 0 to 7
Aggregate index sum of: Proxy by mail, Shares not blocked, cumulative
voting/proportional representation, oppressed minorities, preemptive rights
for sh. Vote and % share capital to call EGM. From 0 to 6.
Equals one if the Company Law or Commercial Code of the country
requires that ordinary
shares carry one vote per share, and zero otherwise. Equivalently, this
variable equals one
when the law prohibits the existence of both multiple-voting and non-voting
ordinary shares
and does not allow firms to set a maximum number of votes per
shareholder irrespective of the
number of shares she owns, and zero otherwise. (La Porta et al., 1998)
Equals one if the Company Law or Commercial Code allows shareholders
to cast all of their
votes for one candidate standing for election to the board of directors
(cumulative voting) or if
the Company Law or Commercial Code allows a mechanism of
proportional representation in
the board by which minority interests may name a proportional number of
directors to the
board, and zero otherwise.
Equals one if the Company Law or Commercial Code grants minority
shareholders either a
judicial venue to challenge the decisions of management or of the assembly
or the right to step
out of the company by requiring the company to purchase their shares when
they object to
certain fundamental changes, such as mergers, assets dispositions and
changes in the articles
of incorporation. The variable equals zero otherwise. Minority shareholders
are defined as
those shareholders who own 10 percent of share capital or less.
Equals one if the Company Law or Commercial Code allows shareholders
to mail their proxy
vote to the firm, and zero otherwise.
Equals one if the Company Law or Commercial Code does not allow firms
to require that
shareholders deposit their shares prior to a General Shareholders Meeting
thus preventing
them from selling those shares for a number of days, and zero otherwise.
54
A-2 Table 2: Shareholder Protection (cont.)
II.2 Securities Law Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
II.2.1 Disclosure Securities Law I Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Prospectus
Compensation
Shareholders
Inside Ownership
Irregular Contracts
Transactions
The index of disclosure equals the arithmetic mean of: (1) Prospect; (2)
Compensation; (3) Shareholders; (4)
Inside ownership; (5) Contracts Irregular; (6) and Transactions.
II. Liability standard
Prospectus Equals one if the law prohibits selling securities that are going
to be listed on the largest stock exchange of the country without delivering
a prospectus to potential investors; equals zero otherwise.
Compensation An index of prospectus disclosure requirements regarding
the compensation of directors and key officers.
An index of disclosure requirements regarding the Issuer=s equity
ownership structure. Equals one if the law or
the listing rules require disclosing the name and ownership stake of each
shareholder who, directly or
indirectly, controls ten percent or more of the Issuer=s voting securities;
equals one-half if reporting
requirements for the Issuer=s 10% shareholders do not include indirect
ownership or if only their aggregate
ownership needs to be disclosed; equals zero when the law does not require
disclosing the name and ownership
stake of the Issuer=s 10% shareholders. No distinction is drawn between
large-shareholder reporting
requirements imposed on firms and those imposed on large shareholders
themselves.
An index of prospectus disclosure requirements regarding the equity
ownership of the Issuer=s shares by its
directors and key officers. Equals one if the law or the listing rules require
that the ownership of the Issuer=s
shares by each of its director and key officers be disclosed in the
prospectus; equals one-half if only the
aggregate number of the Issuer=s shares owned by its directors and key
officers must be disclosed in the
prospectus; equals zero when the ownership of Issuer=s shares by its
directors and key officers need not be
disclosed in the prospectus
An index of prospectus disclosure requirements regarding the Issuer=s
contracts outside the ordinary course of
business. Equals one if the law or the listing rules require that the terms of
material contracts made by the
Issuer outside the ordinary course of its business be disclosed in the
prospectus; equals one-half if the terms of
only some material contracts made outside the ordinary course of business
must be disclosed; equals zero
otherwise.
An index of the prospectus disclosure requirements regarding transaction
between the Issuer and its directors,
officers, and/or large shareholders. Equals one if the law or the listing rules
require that
all transactions in which related parties have, or will have, an interest be
disclosed in the prospectus; equals
one-half if only some transactions between the Issuer and related parties
must be disclosed in the prospectus;
equals zero if transactions between the Issuer and related parties need not
be disclosed in the prospectus.
55
A-2 Table 2: Shareholder Protection (cont.)
II.2 Liability Securities Law II Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Liability standard
for the issuer and
its directors
Liability standard
for distributors
Liability standard
for accountants
Index of the procedural difficulty in recovering losses from the Accountant
in a civil liability case for losses
due to misleading statements in the audited financial information
accompanying the prospectus. Equals one
when investors are only required to prove that the audited financial
information accompanying the prospectus
contains a misleading statement. Equals two-thirds when investors must
also prove that they relied on the
prospectus and/or that their loss was caused by the misleading accounting
information. Equals one-third when
investors must also prove that the Accountant acted with negligence. Equals
zero if restitution from the
Accountant is either unavailable or the liability standard is intent or gross
negligence.
The index of liability standards equals the arithmetic mean of: (1) Liability
standard for the issuer and its
directors; (2) Liability standard for the distributor; and (3) Liability
standard for the accountant.
The index of liability standards equals the arithmetic mean of: (1) Liability
standard for the issuer and its
directors; (2) Liability standard for the distributor; and (3) Liability
standard for the accountant.
Index of the procedural difficulty in recovering losses from the Issuer and
its directors in a civil liability case
for losses due to misleading statements in the prospectus. We first code
separately the liability standard
Index of the procedural difficulty in recovering losses from the Distributor
in a civil liability case for losses
due to misleading statements in the prospectus. Equals one when investors
are only required to prove that the
prospectus contains a misleading statement. Equals two-thirds when
investors must also prove that they relied
on the prospectus and/or that their loss was caused by the misleading
statement. Equals one-third when
investors must also prove that the Distributor acted with negligence. Equals
zero if restitution from the
Distributor is either unavailable or the liability standard is intent or gross
negligence.
56
A-2 Table 2: Shareholder Protection (Cont.)
II.3 Enforcement Securities Law III Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Appointment
Tenure
Focus
Supervisor
characteristics
index
Rule-making
power Index
Document
Witness
Investigative
powers index
The index of public enforcement equals the arithmetic mean of: (1)
Supervisor characteristics index; (2) Rulemaking
power index; (3) Investigative powers index; (4) Orders index; and (5)
Criminal index.
Equals one if a majority of the members of the Supervisor are unilaterally
appointed by the Executive branch
of government; equals zero otherwise.
Equals one if members of the Supervisor cannot be dismissed at the will of
the appointing authority; equals
zero otherwise.
Equals one if separate government agencies or official authorities are in
charge of supervising commercial
banks and stock exchanges; equals zero otherwise.
The index of characteristics of the Supervisor equals the arithmetic mean of:
(1) Appointment; (2) Tenure; and
(3) Focus.
stock exchanges. Equals one if the Supervisor can generally issue regulations
regarding primary offerings
and/or listing rules on stock exchanges without prior approval of other
governmental authorities. Equals onehalf
if the Supervisor can generally issue regulations regarding primary offerings
and/or listing rules on stock
exchanges only with the prior approval of other governmental authorities.
Equals zero otherwise.
An index of the power of the Supervisor to command documents when
investigating a violation of securities
laws. Equals one if the Supervisor can generally issue an administrative order
commanding all persons to turn
over documents; equals one-half if the Supervisor can generally issue an
administrative order commanding
publicly-traded corporations and/or their directors to turn over documents;
equals zero otherwise.
An index of the power of the Supervisor to subpoena the testimony of
witnesses when investigating a violation
of securities laws. Equals one if the Supervisor can generally subpoena all
persons to give testimony; equals
one-half if the Supervisor can generally subpoena the directors of publicly-
traded corporations to give
testimony; equals zero otherwise.
The index of investigative powers equals the arithmetic mean of: (1)
Document; and (2) Witness.
57
A-2 Table 2: Shareholder Protection (Cont.)
II.3 Enforcement Securities Law III Author's analysis from French Law (Doctrine, Codes, Jurisprudence)
Orders issuer
Orders distributor
Orders accountant
Orders index
Criminal
director/officer
Criminal
distributor
Criminal
accountant
Criminal index
An index aggregating stop and do orders that may be directed to the
Accountant in case of a defective
prospectus. The index is formed by averaging the sub-indexes of orders to
stop and to do. The sub-index of
orders to stop equals one if the Accountant may be ordered to refrain from a
broad range of actions; equals
one-half if the
Accountant may only be ordered to desist from limited actions; equals zero
otherwise. The sub-index of orders
The index of public enforcement equals the arithmetic mean of: (1)
Supervisor characteristics index; (2) Rulemaking
power index; (3) Investigative powers index; (4) Orders index; and (5)
Criminal index.
An index aggregating stop and do orders that may be directed to the Issuer in
case of a defective prospectus.
The index is formed by averaging the sub-indexes of orders to stop and to do.
The sub-index of orders to stop
equals one if the Issuer may be ordered to refrain from a broad range of
actions; equals one-half if the Issuer
may only be ordered to desist from limited actions; equals zero otherwise.
The sub-index of orders to do equals
one if the Issuer may be ordered to perform a broad range of actions to
rectify the violation; equals one-half if
the Issuer may only be ordered to perform limited actions; equals zero
otherwise. We disregard orders that
may be issued by Courts at the request of a private party in a civil lawsuit.
An index aggregating stop and do orders that may be directed to the
Distributor in case of a defective
prospectus. The index is formed by averaging the sub-indexes of orders to
stop and to do. The sub-index of
orders to stop equals one if the Distributor may be ordered to refrain from a
broad range of actions; equals
one-half if the Distributor may only be ordered to desist from limited
actions; equals zero otherwise. The subindex
of orders to do equals one if the Distributor may be ordered to perform a
broad range of actions to rectify
the violation; equals one-half if the Distributor may only be ordered to
perform limited actions; equals zero
otherwise. We disregard orders that may be issued by Courts at the request of
a private party in a civil lawsuit.
The index of orders equals the arithmetic mean of: (1) Orders issuer; (2)
Orders distributor; and (3) Orders
accountant.
An index of criminal sanctions applicable to the Issuer=s directors and key
officers when the prospectus omits
material information. We create separate sub-indexes for directors and key
officers and average their scores.
The sub-index for directors equals zero when directors cannot be held
criminally liable when the prospectus is
misleading. Equals one-half if directors can be held criminally liable when
aware that the prospectus is
misleading. Equals one if directors can also be held criminally liable when
negligently unaware that the
prospectus is misleading. The sub-index for key officers is constructed
analogously.
An index of criminal sanctions applicable to the Distributor (or its officers)
when the prospectus omits material
information. Equals zero if the Distributor cannot be held criminally liable
when the prospectus is misleading.
Equals one-half if the Distributor can be held criminally liable when aware
that the prospectus is misleading.
Equals one if the Distributor can also be held criminally liable when
negligently unaware that the prospectus is
misleading.
An index of criminal sanctions applicable to the Accountant (or its officers)
when the financial statements
accompanying the prospectus omit material information. Equals zero if the
Accountant cannot be held
criminally liable when the financial statements accompanying the prospectus
are misleading. Equals one-half
if the Accountant can be held criminally liable when aware that the financial
statements accompanying the
prospectus are misleading. Equals one if the Accountant can also be held
criminally liable when negligently
unaware that the financial statements accompanying the prospectus are
misleading.
The index of criminal sanctions equals the arithmetic mean of: (1) Criminal
director; (2) Criminal distributor;
and (3) Criminal accountant.
58
APPENDIX B: French Stock Market Development Indicators - Key variables trends
(1852-2007)
B-1 Stock Market development time series:
0%
20%
40%
60%
80%
100%
120%
1851
1901
1908
1921
1928
1935
1951
1958
1965
1972
1979
1986
1993
2000
Mar
ket C
ap/G
DP
Market Cap/GDP (1852-2007)
Market Cap/GDP 1852-
2007 (i) Market Cap:
1852-1900: Arbulu
(1998); 1900-2001
(Bozio, 2002); 2002-2007
(Euronext, 2009). (ii)
GDP: Source: 1871-1890
Nominal Growth rates
GDP from Levy-Leboyer
and Bourguignon (1985)
applied to Nominal GDP
1890 Villa (1993)
0
5
10
15
20
25
30
35
40
45
19
13
19
38
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
04
20
07
Do
mest
ic l
iste
d C
om
pa
nie
s/C
ap
ita
Domestic Listed Companies/Capita in
France (1913-2007)
Domestic Listed
Companies/Capita
0%
5%
10%
15%
20%
25%
18
92
18
96
19
00
19
04
19
08
19
12
19
21
19
25
19
29
19
33
19
37
19
60
19
70
19
76
19
80
19
84
19
88
19
92
19
96
20
00
20
04
Eq
uit
y I
ssu
es/
GF
CF
Equity Capital/ GFCF Corporate sector in
France (1892-2007)
Equity Capital/ GFCF Corporate
sector (Source: (i) Equity Issues:
1892-1907: Credit Lyonnais
Statistics modified by Hautcoeur
(1994), 1907-1936: SGF
corrected by Hautcoeur (1994),
1936-1939: Credit Lyonnais in
Sauvy (1984); 1967-1971:
Dubarle, Mouchotte
59
B-2 Stock Market Development and Shareholder protection levels – comparatives:
40% 42%
0.16
36%
23%
0.33
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Mean Stock Market Cap/GDP
Median Stock Market/GDP
Standard Dev Stock Market Cap/GDP
Market Cap/GDP and Sh. Protection (Source:
see text and appendix A; n=102)Low Shareholder protection (1852-1933) (Antidirector rights+1sh/1v ≤1)High Shareholder protection (1966-2007) (Antidirector rights+1sh/1v ≥ 4)
10% 10%
0.05
10%
8%0.07
0%
2%
4%
6%
8%
10%
12%
Mean Equity issues/GFCF
Median Equity issues/GFCF
Standard Dev Equity Issues/GFCF
Equity issues/GFCF and Sh.Protection (Source:
see text and appendix A; n=86)
Low Shareholder protection (1892-1933) (Antidirector rights+1sh/1v ≤1)High Shareholder protection (1966-2007) (Antidirector rights+1sh/1v ≥ 4)
60
APPENDIX C: Key laws pertaining to Shareholder protection
(i) Shareholder rights (antidirector rights and voting rights)
Civil Code 1807 General principles of company law and contractual nature of company
1807 to 1851 "Societe Anonymes" (Limited Company)Societes Anonymes need government authorization to incorporate, through Conseil d'Etat (Supreme
administrative court)
1807 to 1851 "Societes en Commandites par Actions" (Limited Partnerships)Societes en Commandites par Actions (Limited Partnership) incorporation possible without Council
of State approval.
Law of 17/07/1856Societes Anonymes (Ltd Companies) can be incorporated without Council of State authorization if
Capital > 20 Million Francs. Regulation of Commandites par Actions (Limited partnerships)
Law of 24/07/1867 End of government authorisation to incorporate limited liability companies (Societes Anonymes).
Law of 1893 modifying Law of 24/07/1867
Shares of Societes Anonymes (Ltd Co) must be fully paid at issuance to become tradable as Bearer
shares; Initial capital subscribers are liable to capital calls for 2 years following initial subscribtion. All
Societes Anonymes deemed of "commercial" nature (not civil).
Law of 1893 modifying Law of 24/07/1867Authorizes shareholders who do not qualify to attend the AGM to form groupings to attend and vote
in AGM.
Law of 16/11/1903 Authorisation of multiple voting shares, capped at 10 votes per shareholders.
Law of 16/11/1903 Prohinition to exclude any shareholders from General Meetings.
Law of 22/11/1913 Majority and not unanimity needed to modify corporate articles of association.
Law of 23/01/1925 Grouping of shareholders for acton against directors authorized when > 10% of votes.
Law of 03/12/1926 Control of Agiotage in stock exchange
Law of 31/08/1927 Prohibition of trading of founder's share before 2 years
Law of 23/01/1929 Prohibition of excluding minority shareholders from AGM
Law of 23/01/1929 Founder's shares
Law of 30/01/1930 Enhanced Publicity of statutes in J.O (Official Journal of the Republic)
Law of 19/06/1930 Regulation of Banker profession
Law 13/11/1933Prohibition of multiple voting rights in principle with one exception: double voting if shares have
been held for 2 years.
Decret Loi 30/10/1935 Intagibility of method of financial statements
Decret-Lois (Government ruling) 30/10/1935 Specific rules for companies with public ownership: preemptive rights
Decret-Lois (Government ruling) 30/10/1935 Mandatory use of bank as underwriter for capital issuance > 10 Million Francs.
Decret-Lois (Government ruling) 30/10/1935Disclosure, voting rights and penal liabilities for directors Administrateurs when breaching duties
and corporate interest.
Decret Loi du 31/08/1937Obligation to choose Commissioners of Accounts ("CAC") from government approved listing to
certify accounts to Shareholders and AGM
Law of 1947 Standardized Chart of Account for companies (Plan Comptable General)
Ordinance of 04/02/1959 Creation of BALO (mandatory information registry for corporations)
Jurisprudence from Cour de Cassation Cass Com 18/04/1961 "Piquard" Reaffirms liability of directors when breaching fiduciary duties.
Law of 24/07/1966
New Company Law modifying Law of 1867: increased security of third parties (nullity of companies
are limited)/Increased protection of shareholders (information disclosure, mandatory external auditor,
with reinforced prerogatives), minority shareholder rights/ Increased penal liability for
directors/Voting rights allowed to be capped by insiders.
Law of 31/12/1970 Stock options for employees
Law of 24/10/1980 (80-834) Preferred shareholders attendance of assemblies (without voting rights).
Law of 03/01/1983 Shareholdings for Employees encouraged.
Law of 03/01/1983 (83-363) Authorization of proxy Law (implementation decree in 1986-88 only)
Law of 03/01/1985 (85-11) Consolidated accounts for groups.
Law of 03/01/1985 (85-21) Stock Option for employees encouraged.
Decree (n°86-584) 14/03/1986 (Special Decree Conseil d'Etat Decree) Proxy voting application decree.
Ordinance (n°86-1135) Employees representatives member of the Board of Directors allowed.
Law of 23/06/1989Groupings of Shareholder with voting rights >10% can designate an expert to assess management of
the company and litigate to court as an association.
Law NRE 2001
Separation of the functions of chairman of the board and CEO, strengthened the control function of
the board, higher level of transparency with respect to remuneration, and by increased rights of
minority shareholders and employees rights (preemptive share capital in case of equity issuance,
increased inclusion in corporate governance bodies and decision making).
Law of 17/01/2002 Mandatory board membership through at least one representative for employees owning more than
3% of capital.
Law of 2003 on Financial Security
Creation of AMF (Financial Markets Authority) with enhanced securities regulation power on
information and functioning of financial markets, as a result of merger of COB (securities regulator)
and CMF. Creation of High Council of Legal Audit (Haut Conseil du Commissariat aux
Comptes) to monitor the accounting profession. Increased information requirements between board
and shareholders.
Law of 2005 on Financial Modernization Increased control and information on CEO and Directors compensation.
61
(ii) Securities Law (disclosure, liability and public enforcement)
Law of 17/07/1856
Law of 30/01/1907 Mandatory publication to official public registry for all listed companies.
Decret Loi 30/10/1935 Liability of directors in disclosure in equity issuance "relatif au demarchage de l'epargne"
Ordinance 07-833 28/09/1967 (COB instructions for dislosure requirements)Creation of public regulatory agency "COB" to ensure faithful reporting/prospectus for issuing
companies, with sanction powers.
Laws of 1970 Strict prohibition of insider trading and increased penal liabilities.
Law of 14/12/1985 (n°85-1321) Modifying securities law
Law (n° 87-416) of 17/06/1987 Savings
Law (n°88-1201) 23/12/1988 Creation of open ended fund vehicles "OPCVM" and "FCP" to promote the development of
institutional investors.
Law (n°89-531) 02/08/1989 Security and transparency of financial marketsIncreased power for Securities regulator: COB can issue rulings and sanction accordingly, conditional
upon validation of Ministry of Finance, so as to ensure faithful information and adequate functioning
of financial markets.
Law (n°89-531) 02/08/1989 Security and transparency of financial marketsTakeover tender offer must be announced when an outsider has bought 33.3% of shares.
Decree (n°90-263) 23/10/1990. Administrative sanctions from COB and recourse in justice of COB decisions
Law n°90-1002 07/1/1990 Participation of employees to profits.
Law (n° 96-597)02/07/1996 Creation of council of financial markets regulator along COB
COB ruling (n°96-01) 08/11/1996 COB control of opposition to issuance
(iii) Securities Law: Market for Corporate Control
Law (n°89-531) 02/08/1989 Security and transparency of financial marketsMandatory Takeover tender offer must be announced when an outsider has bought 33.3% of shares.
Numerous COB rulings and other laws (1990's)Extensive disclosure obligations on shareholders, acting alone or jointly, when they pass (in either
direction) a thresholds of holdings either voting rights or capital.
(iv) EC/EU Major Directives
Directive on information of listed companies 15/02/1982 Standarization and enhancement of information for listed firms (financial and corporate information)
Directive on funds 20/12/1985
Directive on investment services in financial instruments 10/05/1993
Directive on Prospectus (2003) Standarization and enhancement of Prospectus requirements
Directive Transparency (2004) Standarization and enhancement of information for listed firms (financial and corporate information)
Directive Takeover (2004) Standarization and enhancement of takeover regulation to facilitate market for control
(v) Other laws relevant to corporate governance
Law of 07/03/1925
Creation of another form of corporate structure along 'Societes Anonymes" (Limited companies).
Societes en Commandite par Actions (Limited Partnerships): "Societes a Responsabilites Limitees"
very popular form, not able to raise public equity.
Laws 1987-1988 Creation of derivatives markets (MATIF, MONEP) at the Paris Stock Exchange
Law of 22/01/1988
End of "Compagnie des Agents de Changes" ministerial monopoly agents status (Stock exchange
agents/broker organization) transformed into a company "Societes des Bourses Fracnaises" (French
Stock Exchange Company)
(vi) Corporate Governance Codes Voluntary compliance (non mandatory => most listed companies comply on a voluntary basis)
Vienot I (1995)
Vienot II (1999)
Bouton Report (2002)
Improvements concerning the board of directors (stronger independence, a higher degree of
formalization, better information, an improved evaluation), the board committees (audit,
remuneration, and nominating committees), the independence of legal auditors, and financial
information.
62
APPENDIX D: French Shareholder Protection evolution in comparative perspective
D-1 Antidirector Rights
0
1
2
3
4
5
6
7
1851 1861 1867 1899 1907 1935 1938 1948 1950 1954 1967 1975 1980 1985 1986 1989 2001 2007
LL
SV
In
dex
(0
-6)
Antidirector Rights: France in Comparative perspective
(1852-2007) (Source: France: Author's coding, 2009;UK: Franks, Mayer, Rossi, 2006; Ger: Franks, Mayer, Wagner
2005; JP: Franks, Mayer, Miyajima, 2009)
France
Britain
Germany
Japan
63
D-2 Securities Law
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
18
51
18
67
19
07
19
29
19
35
19
48
19
61
19
67
19
86
19
89
20
01
20
07
Securities Law: Disclosure France
and UK (1852-2007) (Source: author's
calculations; Franks, Mayer, Rossi, 2009)
Disclosure Securities Law
I: France (1852-2007)
Securities Law I
Disclosure UK (1852-
2007)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
18
51
18
67
19
07
19
29
19
35
19
48
19
61
19
67
19
86
19
89
20
01
20
07
Securities Law: Liability Standards
in France and UK (1852-2007) (Source:
author's calculations; Franks, Mayer, Rossi, 2009)
Liability Securities Law
II: France (1852-2007)
Securities Law II Liability
UK (1852-2007)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Securities Law: Public Enforcement
in France and UK (1852-2007) (Source:
author's calculations; Franks, Mayer, Rossi, 2009)
Enforcement Securities
Law III France (1852-
2007)
Securities Law III:
Enforcement UK (1852-
2007)
64
APPENDIX E: Statistical Analysis
E- 1 ADF statistics for selected data
Null Hypothesis: D(tseries) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic Based on AIC, MAXLAG=10)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -8.851617 0.000000
Test critical values: 1% level -3.497091
5% level -2.890616
10% level -2.582362
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(tseries,2)
Method: Least Squares
Date: 11/30/2009 Time: 8:41:47 PM
Included observations: 100 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob
D(tseries(-1)) -0.880687 0.099495 -8.851617 0.000000
C 0.006908 0.008811 0.784007 0.434927
R-squared 0.444290 Mean dependent var -0.001558
Adjusted R-squared 0.166436 S.D. dependent var 0.116902
S.E. of regression 0.087589 Akaike info criterion -2.012517
Sum squared resid 0.751846 Schwarz criterion -1.960414
Log likelihood 102.625846 F-statistic 78.351130
Durbin-Watson stat 1.981797 Prob(F-statistic) 0.000000
Augmented Dickey-Fuller Unit Root Test on Market Cap/GDP
Null Hypothesis: D(tseries) has a unit root
Exogenous: Constant
Lag Length: 1 (Automatic Based on AIC, MAXLAG=10)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -10.393550 0.000002
Test critical values: 1% level -3.512357
5% level -2.897212
10% level -2.585874
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(tseries,2)
Method: Least Squares
Date: 11/30/2009 Time: 8:40:14 PM
Included observations: 82 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob
D(tseries(-1)) -1.570851 0.151137 -10.393550 0.000000
D(tseries(-1),2) 0.426160 0.101976 4.179030 0.000075
C 0.002805 0.004883 0.574437 0.567304
R-squared 0.632305 Mean dependent var -0.000005
Adjusted R-squared 0.387175 S.D. dependent var 0.071921
S.E. of regression 0.044160 Akaike info criterion -3.366100
Sum squared resid 0.154058 Schwarz criterion -3.278049
Log likelihood 141.010097 F-statistic 67.926058
Durbin-Watson stat 2.050387 Prob(F-statistic) 0.000000
Augmented Dickey-Fuller Unit Root Test on Equity/Investment
65
E-2 Regression output and correlations -- Legal Origins testing: Market Cap/GDP and
Shareholder Protection in France (1852-2007) (n=98): (Sample specifications)
66
67
E-3 Regression output and correlations -- Legal Origins testing: Equity
issues/investments and Shareholder Protection in France (1852-2007) (n=84)
68
E-4 Regression output and correlations -- Trade Openness testing: Market Cap/GDP
and Trade Openness in France (1852-2007) (n=98) (Sample specifications)
69
E-5 Regression output and correlations -- Trade Openness testing: Equity
Issues/Investment and Trade Openness in France (1852-2007) (n=82) (Sample
specifications)
70
71
APPENDIX F: Other relevant macroeconomic and financial variables:
1900 1950 2000
France 3.8% 5.8% 1.1%
Germany 5.8% 2.5% 1.6%
Britain 4.2% 4.2% 2.4%
US 4.5% 7.3% 1.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Div
iden
d Y
ield
Comparative Dividend Yields
(Source: Dimson et al., 2002)
0%
10%
20%
30%
40%
50%
60%
1851
1902
1910
1924
1932
1949
1957
1965
1973
1981
1989
1997
2005
%
French Corporate Tax Rate %
(Source: Statutory rates: Pre-1973
corporate tax rates: Hautcoeur
(1994); Levasseur and Olivaux
(1981))
French Corporate Tax
Rate % (Statutory
rates: Pre-1973
corporate tax rates:
Hautcoeur (1994);
Levasseur and Olivaux
(1981))
0.00
0.10
0.20
0.30
0.40
0.50
0.60
18
51
1902
1910
1924
1932
19
49
1957
1965
1973
1981
19
89
1997
2005
Ex
po
rt+
Imp
ort
s/G
DP
Openess (X+M)/GDP Nouveaux FF
in France (1852-2007) (Source: Levy
Leboyer and Bourguignon (1985),
A.Sauvy and Annuaire statistique
INSEE from 1949-2007)
Openess (X+M)/GDP
Nouveaux FF in
France (1852-2007)
(Source: Levy Leboyer
and Bourguignon
(1985), A.Sauvy and
Annuaire statistique
INSEE from 1949-
2007)
