“Law and finance”: Inaccurate, incomplete, and important

On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy … Your main constituents are your employees, your customers and your products. – Jack Welch, former CEO of General Electric Introduction While virtually all scholars of corporate governance agree that there exist national differences in corporate governance practices and their efficacy, there is an ongoing debate about the relevant dimensions of difference and how they may best be explained. In this chapter, we argue that the strong conceptual and empirical link between law and finance as proposed within the legal origins theory and fully launched in a series of articles by LLSV is inaccurate, incomplete, and yet important. At the least, it is important to get a clearer view of the field such that we may better understand the broader scope of the “law–finance” relationship, particularly as the law and finance theory has had demonstrated effects on international policy developments. A number of scholars have effectively demonstrated the key shortcomings of this theoretical and empirical unidirectional linkage from law to finance. We do not need to review that literature here, but find it convincing. And, in response to some of their critics, La Porta, Lopez-de-Silanes, and Shleifer have rectified some of their strong and prescriptive former claims. In this chapter, we discuss in Section II what we have learned from this agitated debate with so many policy and real-life ramifications, why it is important to conceptualize a larger and more complex picture of the proposed law–finance causality, what we can learn from existing research on comparative systems in social science, and what we need to study next in the field of research of legal systems and economic sociology. In Section III, we discuss why it is important to get “law and finance” right.