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  American Law and Economics Review
  Volume 7, Issue 1, Spring 2005
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  • [ARTICLES] The Value of Judicial Independence: Evidence from Eighteenth Century England
        Klerman, D. M.
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    This article assesses the impact of changes in judicial independence on equity markets. North and Weingast (1989) argue that judicial independence and other institutional changes inaugurated by the Glorious Revolution of 1688–89 improved public and private finance in England by putting restraints on the government. We calculate abnormal equity returns at critical points in the passage of statutes giving judges greater security of tenure and higher salaries. Early-eighteenth-century legislation granting tenure during good behavior is associated with large and statistically significant positive abnormal returns. Other statutes had positive but generally insignificant effects.

  • [ARTICLES] Legal Regime and Contractual Flexibility: A Comparison of Business's Organizational Choices in France and the United States during the Era of Industrialization
        Lamoreaux, N. R.
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    We compare the law governing business organizational forms in France and the United States during the nineteenth century and find that, contrary to the conventional wisdom, the contracting environment in the U.S. was neither freer nor more flexible than in France. U.S. businesses had a more limited menu of organizational choices and also much less ability to adapt the basic forms to meet their needs. Moreover, American law did not evolve any more readily in response to economic change than French law. In both nations, major changes in the rules governing organizational forms required the passage of new statutes.

  • [ARTICLES] American Civil Law Origins: Implications for State Constitutions
        Berkowitz, D.
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    We examine the effect of initial legal traditions on constitutional stability in the American states. Ten states were initially settled by France, Spain, or Mexico and had developed civil law legal systems at the time of American acquisition. Although Louisiana retained civil law, the remaining nine adopted common law. Controlling for contemporaneous and initial conditions, civil law states have substantially higher levels of constitutional instability at the end of the twentieth century. We speculate that this effect is attributable to instability in property rights caused by the change in national governments and to the legacy of the civil law system.

  • [ARTICLES] Conscription as Regulation
        Mulligan, C. B.
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    We examine the practice of military conscription around the world from the perspective of two standard theories as well as a new one, which emphasizes the fixed cost of introducing and administering the draft as a deterrent to its use. We find that, holding the relative size of the military constant, higher population countries are more likely to use the draft. We also find that French legal origin countries, which we see as facing lower fixed and variable administrative costs, are more likely to draft than are common-law countries. Conscription does not seem to be influenced by democracy and is influenced by the deadweight costs of taxation only in countries with very large militaries. The results suggest that fixed costs of introducing and administering new regulations may be an important determinant of their use.

  • [ARTICLES] 150 Years of Patent Office Practice
        Lerner, J.
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    This article examines the administrative practices of the patent offices in 60 countries over a 150-year period, a little explored arena where government bodies and private firms interact. Larger and wealthier countries where international trade is more important give patent applicants more options. In these nations, patent office administrators’ flexibility is often restricted and the responsibility for determining patentability divided between the patent office and the courts. Civil law nations tend to rely solely on the courts to determine patent validity and restrict the discretion of patent office administrators. They also tend to offer patent applicants more options.

  • [ARTICLES] Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence
        Beny, L. N.
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    Despite the long-standing insider trading debate, there is little empirical research on insider trading laws, especially in a comparative context. The article attempts to fill that gap. I find that countries with more prohibitive insider trading laws have more diffuse equity ownership, more accurate stock prices, and more liquid stock markets. These findings are generally robust to controlling for measures of disclosure and enforceability and suggest that formal insider trading laws (especially their deterrent components) matter to stock market development. The article suggests further avenues of empirical research on the specific mechanisms through which insider trading laws might matter and the political economy of their adoption.

  • [ARTICLES] Governing Stock Markets in Transition Economies: Lessons from China
        Pistor, K.
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    Jump-starting stock markets in transition economies has proved difficult. These countries lack effective legal governance structures and face severe information problems. Yet not all financial markets failed because of adverse conditions. Using China’s initial stock market development as a case study, this article suggests that administrative governance can substitute for formal legal governance. At the core of this governance structure was the quota system. It created incentives for regional competition and decentralized information collection at the IPO stage. It was also used to punish regions and responsible officials when companies from their regions failed, as evidenced herein.

  • [ARTICLES] Law and Firms' Access to Finance
        Demirguc-Kunt, T. B. A.
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    This article examines how a country’s legal origin influences the operation of its financial system by using firm-level survey data across a broad cross-section of countries on the obstacles that firms face in raising external finance. Using panel regressions, the article assesses two channels through which legal origin may influence the financial system. We find that the adaptability of a country’s legal system is more important for explaining the obstacles that firms face in accessing external finance than the political independence of the judiciary.

  • [ARTICLES] Bankruptcy around the World: Explanations of Its Relative Use
        Claessens, S.
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    The law and finance literature highlights the role of investor rights in financial development, firm corporate governance, and financing patterns. For a panel of 35 countries, we investigate how bankruptcy use relates to countries’ creditor rights and judicial efficiency. Bankruptcies are higher in countries with more creditor rights, except for a "no automatic stay on assets" provision. Higher judicial efficiency is associated with more bankruptcies and appears as a substitute with more creditor rights. Although only a first step, our findings suggest creditor rights are complex, balancing prioritization of claims, ex ante risk-taking incentives, and an efficient resolution of distressed firms.

  • [ARTICLES] Laws for Sale: Evidence from Russia
        Slinko, I.
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    How does regulatory capture affect growth? We construct measures of the political power of firms and regional regulatory capture using microlevel data on the preferential treatment of firms through regional laws and regulations in Russia during the period 1992–2000. Using these measures, we find that: (1) politically powerful firms perform better on average; (2) a high level of regulatory capture hurts the performance of firms that have no political connections and boosts the performance of politically connected firms; (3) capture adversely affects small-business growth and the tax capacity of the state; and (4) there is no evidence that capture affects aggregate growth.

    "oligarchy ... throws a close network of dependence relationships over all the economic and political institutions of present-day bourgeois society without exception... ."

    —Vladimir Lenin, "Imperialism: The Highest Stage of Capitalism" (1916)