1. Analyzing “Shareholder protection and stockmarket development: an
empirical test of the legal origins hypothesis” by Armour, Deakin, Sarkar,
Siems and Singh
Question 1:
Explain what the researchers wanted to find out. What research methods did they employ?
What criticisms may be made of the research design?
Answer 1:
The researchers of the article “Shareholder protection and stockmarket development: an
empirical test of the legal origins hypothesis”1
wanted to find out the “law matters” and
“legal origin” claim as propounded in 1998 by La Porta et al.2
in a different longitudinal
setup where country-specific variables are discarded in favour of functional and general
descriptors to understand legal change in the area of shareholder protection. The researchers
also try to find out a link between increased shareholder protection and stock market
development over the period from the mid-1990s till 2005, to investigate whether “legal
origin” affects the efficiency of any legal rules and leads to economic development of the
area. The researchers question the claim of La Porta et al. that common-law countries have
better shareholder protection which in turn leads to better stock market development.
The research methodology is mainly quantitative as only the theoretical perception as
enumerated by La Porta et al. in “Law and Finance” is sought to be countered by the
researchers in this article. The researchers utilize the panel data format to understand the
direction of causation in the relationship between legal and economic development.3
The
research method utilized by the researchers in this article is different from the methodology
utilized by La Porta et al. in “Law and Finance”4
. The researchers here utilize indices that do
not exclusively focus on ‘positive’ legal rules. Here, the researchers take into account self-
regulatory codes, wide range of legal information and other sources of norms such as
takeover codes and corporate governance codes to expand the dataset5
. Most importantly, the
1
J Armour S Deakin P Sarkar M Siems and A Singh, ‘Shareholder Protection and Stock Market Development:
An Empirical Test of Legal Origins Hypothesis’ (2009) 6 (2) Journal of Empirical Legal Studies 343.
2
R La Porta F Lopez de Silanes A Shleifer and R Vishny, ‘Law and Finance’ (1998) 106 Journal of Political
Economy 1113.
3
J Armour S Deakin P Sarkar M Siems and A Singh, ‘Shareholder Protection and Stock Market Development:
An Empirical Test of Legal Origins Hypothesis’ (2009) 6 (2) Journal of Empirical Legal Studies 343.
4
R La Porta F Lopez de Silanes A Shleifer and R Vishny, ‘Law and Finance’ (1998) 106 Journal of Political
Economy 1113.
5
J Armour S Deakin P Sarkar M Siems and A Singh, ‘Shareholder Protection and Stock Market Development:
An Empirical Test of Legal Origins Hypothesis’ (2009) 6 (2) Journal of Empirical Legal Studies 351.

2. indices are longitudinal instead of being simply cross-sectional, implying that the legal rules
are coded as they have evolved over the years. The index utilized by the researchers in this
article is more extensive compared to La Porta et al.
The research design of J Armour et al. provides a very interesting view of the evolution of the
legal regime in common law as well as civil law systems. However, the research deign can be
criticized since it takes into account only a very short span of time from 1995 till 2005 to
reach its conclusions. Further, comparative law methodology is rather subjective and elective
and there have been considerable differences in selection of indices for quantitative analysis
amongst scholars, practitioners and countries6
. Further, a link back to the empirical data and
financial markets is the sin qua non of methodological validity, but the researchers have only
utilized data from the listed companies using 10 variables to reach their conclusions. The
dataset utilized by the authors is less robust and there may be certain coding errors since the
variables that they have selected are limited. The implication of law in development of
financial market is a very robust field which requires consideration of various other factors
which the researchers have failed to include in their research design.
Question 2:
What conclusions do the authors draw from their empirical research? Explain whether these
conclusions are justified.
Answer 2:
The authors of the article draw two conclusions from their empirical research. Firstly, they
reach the conclusion that “legal origins” does affect the content of substantive law for both
developed and developing nations, that is, common law systems had stronger shareholder
protection compared to civil law systems for the period 1995-20057
. This conclusion is in
conformity with the claim of La Porta et al. in “Law and Finance”. However, they also state
civilian systems were also fast developing laws to protect shareholders. The authors claim
that civil law systems are fast catching up with common law systems due to convergence of
laws, development of transnational companies and prevalence of global institutional investors
in civil law countries.
6
K Hopt, ‘Response: American Corporate Governance Indices as seen from European Perspective’ (2009) 158
University of Pennsylvania Law Review 29.
7
J Armour S Deakin P Sarkar M Siems and A Singh, ‘Shareholder Protection and Stock Market Development:
An Empirical Test of Legal Origins Hypothesis’ (2009) 6 (2) Journal of Empirical Legal Studies 371.

3. Secondly, the researchers found that there was no link between shareholder protection and
stock market development in common law systems, nor in civil law systems or developed
countries, casting doubt over the claims of La Porta et al.
The first conclusion of the authors is justified because several scholars have reported that
common law countries had easily adopted corporate governance codes in the 1990s compared
to civil law systems8
and had provided for better shareholder protection compared to civil law
systems9
. During the period 1995-2005, common law systems adopted core elements of
company law such as independent board members and takeover codes, compared to civil
jurisdictions.10
This hugely impacted the development of shareholder protection in common
law systems. The authors have also rightly concluded that there was diffusion of legal rules
amongst civil law systems during 1995-2000. Thus, over time, the differences in shareholder
protection rules substantially decreased between common law and civil law countries.
The second conclusion that shareholder protection does not really help in stock market
development is also justified because within the given period under review there was no
connection between the extent of legal protection of shareholders and the financial
development of countries. The authors have cited all its sources to establish that excessive
laws to protect shareholder interest may lead to unnecessary costs11
or excessive regulation
can lead to de-listings of companies from the stock market12
. The findings of the authors are
justified because there were several coding errors in the research work of La Porta et al.
which have been avoided by the authors of the present work. Further, they have also
explained that “legal origins” is endogenous to particular economic contexts. Thus, the
development of shareholder protection in less developed countries has not resulted in stock
market development in such countries. The economic situation of any particular country
significantly impacts the development of stock market. Stock market development is
dependent on several other factors but not on shareholder protection rules. This has also been
established by other researchers such as C Mayer13
and K Hopt14
in their seminal works. The
conclusions arrived at by the authors of the article are justified and they are substantiated by
8
R Aguilera and A Cuervo-Cazurra, ‘Codes of good governance worldwide: what is the trigger?’ (2004) 25
Organization Studies 430.
9
C Mayer, ‘Trust in Financial Markets’ (2008) 14 European Financial Management 617.
10
J Armour S Deakin P Sarkar M Siems and A Singh, ‘Shareholder Protection and Stock Market Development:
An Empirical Test of Legal Origins Hypothesis’ (2009) 6 (2) Journal of Empirical Legal Studies 371.
11
Ibid 371.
12
Ibid 374.
13
C Mayer, ‘Trust in Financial Markets’ (2008) 14 European Financial Management 617.
14
K Hopt, ‘Response: American Corporate Governance Indices as seen from European Perspective’ (2009) 158
University of Pennsylvania Law Review 27.

4. the citations and future research work. It can be justly said that the authors have been able to
establish that the range of data utilized by them in this article are justified and conclusive of
their claims.
Question 3:
To what extent does this article embody prescriptive legal scholarship, or is it merely
descriptive? Justify your answer and evaluate the approach adopted.
Answer 3:
Legal scholarship can be categorized as either descriptive or prescriptive. However, most of
the descriptive work contains at least a sprinkling of prescriptive work and it becomes
difficult to analyze a particular work as simply being descriptive or prescriptive15
. This article
embodies a mix of descriptive and prescriptive legal scholarship. Although at the outset this
article is descriptive in nature since it compares the legal system of common law system and
civil law system to draw conclusion that “legal origins” has played an important role in
development of shareholder protection. This form of comparison, intended to clarify the
claim of La Porta et al. in “Law and Finance” has descriptive legal scholarship qualities. The
approach of the Armour, Deakin, Sarkar, Siems and Singh has been to use panel data from 20
different countries, both from civil and common law jurisdictions, to understand the
development of shareholder protection law development over the period 1995-2005. The
authors of the article try to analyse the contour and structure of the “legal origins” and “law
matters” claim of La Porta et al.
Further, in this article, the authors showcase descriptive legal scholarship because they negate
the claim of La Porta et al. that strict shareholder protection laws has a positive impact on
stock market development. The authors approach the subject by narrowing the time period to
1995-2005 but extend the number of countries subjected to the test to 20 different countries.
The authors approach the subject from a theoretical point of view with empirical results to
substantiate their claim that shareholder protection has no real impact on stock market or
financial development in any common law or civil law systems. Their approach cannot be
categorized as absolutely prescriptive in nature because the realm of their study has no real
recommendations for the law’s improvement. However, their descriptive emphasis of
similarity of shareholder protection rules in common law systems as well as civil law systems
15
Dennis Patterson, A Companion to Philosophy of Law and Legal Theory (2nd
edn Wiley-Blackwell 2010) 552.

5. points in the direction of convergence which has a prescriptive element to it16
. This article has
prescriptive legal scholarship because it has at least one obvious audience, that is legal
scholars and since this article criticizes existing scholarship or recommendations17
of La
Porta et al. The trend of modern scholars to engage in social policy debate is also one of the
features of the present article. The authors engage in discussing law and economics by
showcasing that shareholder protection laws has no impact on stock market development,
thus paving way for deploying their amplified empirical capabilities within the prescriptive
framework of legal analysis18
. This article would have an impact on the judiciary as well as
the legal fraternity since it will help them understand the importance of shareholder
protection laws. Although this article is perceived to showcase only descriptive legal
scholarship but it will pave way for further research which definitely has prescriptive legal
scholarship values.
Question 4:
How does this article contribute to the literature and/or policy-making? Explain the
limitations of these contributions, if any.
Answer 4:
This article contributes to the literature that “legal origins” have a significant effect on
shareholder protection rules development. The seminal research work of La Porta et al. in
1998 that focussed on this subject and claimed that common law systems has better
shareholder protection rules compared to their counterpart civilian law systems has been
hugely debated in the scholarly circles for long. However, there was not any conclusive
research work conducted to question the claim of La Porta et al. or to substantiate the same.
This article contributes richly to the literature by stating that common law systems does hold
a strong position in terms of development of shareholder protection laws compared to civil
law systems for the time period 1995-2005. This work focuses on 20 different countries from
civil law systems, common law systems, developing, developed and under-developed
countries to draw comparison of the development of law in these countries and the different
considerations that regulated the development of law. This article significantly contributes to
the empirical results associated with the “legal origins” claim of La Porta et al. and they point
16
Christopher Bruner, Corporate Governance in the Common-Law World: The Political Foundations of
Shareholder Power (1st edn Cambridge University Press 2013) 17.
17
Dennis Patterson, A Companion to Philosophy of Law and Legal Theory (2nd
edn Wiley-Blackwell 2010) 551.
18
Ibid 554.

6. towards the need for deeper reflections in such foundations. The authors claim that pressures
for convergence and global companies along with the influence of globally oriented
institutional investors have resulted in the development of shareholder protection laws in
developing countries19
. The authors have further contributed to the “legal origins” claim by
stating that in the period around 2005, most civil law systems have also reformed their
financial laws to provide better protection to shareholders. The civil law system is fast
catching up with common law systems and the differences might converge soon.
This article does not significantly contribute to any policy making but it does establish that
shareholder protection laws had no real impact on stock market development. Legislators and
scholars would greatly benefit from this knowledge as they would understand how to develop
stock market and what factors affect the development of financial institutions. However, there
are certain limitations to the contribution made by the authors through this article. Firstly, the
data is limited to a short span of time from 1995-2005. The authors have acknowledged that
any development of stock market may be attributed to legal changes as well as development
in other factors, such as regulatory competition and transnational convergence, may play a
role in the development of stock market, which needs to be studied empirically in future.
Further, the stage of economic development in a particular country has also impacted stock
market development so it is difficult to assert whether shareholder protection rules had really
had any impact in the overall stock market development. The dataset of the present article is
less robust and the variables identified as important for measurement of stock market
development is highly subjective. Thus, there are certain limitations to the overall research
outcome.
Bibliography
Armour, J Deakin, S Sarkar, P Siems, M and Singh, A, ‘Shareholder Protection and Stock
Market Development: An Empirical Test of Legal Origins Hypothesis’ (2009) 6 (2) Journal of
Empirical Legal Studies 343
Aguilera, R and Cuervo-Cazurra, A, ‘Codes of good governance worldwide: what is the trigger?’
(2004) 25 Organization Studies 415
19
J Armour S Deakin P Sarkar M Siems and A Singh, ‘Shareholder Protection and Stock Market Development:
An Empirical Test of Legal Origins Hypothesis’ (2009) 6 (2) Journal of Empirical Legal Studies 376.

7. Bruner, C, Corporate Governance in the Common-Law World: The Political Foundations of
Shareholder Power (Cambridge University Press 2013)
Hopt, K, ‘Response: American Corporate Governance Indices as seen from European Perspective’
(2009) 158 University of Pennsylvania Law Review 27
La Porta, R Lopez de Silanes, F Shleifer, A and Vishny, R, ‘Law and Finance’ (1998) 106 Journal of
Political Economy 1113.
Mayer, C, ‘Trust in Financial Markets’ (2008) 14 European Financial Management 617
Patterson, D, A Companion to Philosophy of Law and Legal Theory (Wiley-Blackwell 2010)