Dr. Mauro Guillén of Wharton joins Dr. Laurence Capron of INSEAD in publication of paper titled, “State Capacity, Minority Shareholder Protections, and Stock Market Development”
Dr. Mauro Guillén, University of Pennsylvania’s Wharton School professor and Director of the Lauder Institute has joined Dr. Laurence Capron of INSEAD in an examination of legal protections for minority shareholders. The research, published under the title, “State Capacity, Minority Shareholder Protections, and Stock Market Development” in Administrative Science Quarterly, compares countries with a long history in shareholder protection with countries across Western Europe, East Asia, and, especially, Eastern Europe and Central Asia who have just recently passed new legislation protecting minority shareholders.
Countries like Britain and the United States have had longer standing legal provisions in place to protect the rights of minority shareholders against the actions and decisions of large shareholders and management. As a result, money flowed into the stock market, and capitalization grew vigorously, dwarfing all other markets around the world. Beginning in the 1980s, however, countries in Continental Europe and Asia introduced reforms in their corporate legislation. What drove these changes? Did they result in the growth of the stock market?
Figure 1: Guillén-Capron Minority Shareholder Protections Index, Selected Countries
Capron and Guillén assembled information on legal protections for minority shareholders in as many as 78 countries since 1970. Their analysis reveals that many countries around the world passed such new rules and regulations in response to a number of factors, including new economic ideas about free markets, imitation of other countries in the same region, emulation of the United States as the global financial leader, and pressures from the International Monetary Fund, which grew eager to induce countries in under financial stress to implement reforms. By the 2010s, the countries in the world with the greatest degree of protection of minority shareholders were Kazakhstan, Russia, Uzbekistan, South Korea, Mauritius, and Poland. This brings into question whether legal reforms protecting minority shareholders are actually enforced and effective, or if they remain largely ceremonial.
Capron and Guillén account for a number of economic and financial variables, conclusively demonstrating that the adoption of legal protections has increased stock market capitalization, trading, and turnover. But they also found that the beneficial effects of such legal provisions are larger when the government has the capacity to enforce them.
Figure 2: Average Guillén-Capron Index of Minority Shareholder Rights Protections for Countries within the same Legal Tradition
In conclusion, Capron and Guillén believe governments should continue to promote minority shareholder rights as an antidote against the abusive use of private information.
With global competition for capital intensifying, having an appropriate legal framework that protects minority shareholders should be at the top of the policymaking agenda. Companies making investments in foreign countries need to carefully consider the extent to which minority shareholder rights are protected whenever they make decisions about floating part of their equity in a foreign subsidiary. Investors seeking global diversification of their portfolios also need to study the international map of shareholder protections before making decisions.
The paper, with the full methodological explanation, is at:
http://asq.sagepub.com/content/early/2015/08/11/0001839215601459.abstract
Capron and Guillén have made their data available at:
https://whartonmgmt.wufoo.com/forms/guillencapron-shareholder-protections-index/
Dr. Mauro Guillén’s interview with Knowledge@Wharton can be found at:
https://youtu.be/iFLZKBTWbwc
About the Lauder Institute
Founded in 1983 by Leonard and Ronald Lauder in honor of their father, the University of Pennsylvania’s Joseph H. Lauder Institute for Management & International Studies provides a fully integrated business education to a new generation of global leaders. The Lauder Institute offers two joint-degree programs that combine the power of a professional credential in business from the Wharton School or law from Penn Law with a master of arts in International Studies. Integrating excellent teaching in tailored arts and sciences coursework with advanced language study and cultural immersion experiences, the joint-degree program at Lauder was the first of its kind and has remained in a class by itself.
For more information, visit www.lauder.wharton.upenn.edu.
