Legal rules, governance structures and financial systems

This paper intends to reexamine commonly accepted view on association of legal rules with corporate governance and financial markets. It summarizes findings of a number of empirical studies and gives view of current thinking on association between legal rules and financial systems characterized by ownership patterns, nature of equity, governance structure, finance behavior and capital structure. Nature and effectiveness of financial systems across countries can be partly traced to the differences in legal structures. On the other hand, legal systems are products of different governance and financial systems that place different "demands" on legal institutions. Thus, on the issue of causality, we argue that legal systems evolve as a reflection, as well as a cause, of different governance and financial systems. The practical implication is that few strong conclusions can be deduced about the policy reform. Thus, the policy reform should rely on basic principles.