Abstract
This paper belongs to the growing body of the “Law and finance” literature based on time-series study. It carries out an empirical investigation of the role of corporate governance in financial development. We focus on French corporate governance reforms in order to examine whether these reforms are consistent with the reorganization of the French financial system, which took place during the period 1977–2004. This research aims at evaluating one proposition of the legal origin claims based on the idea that there is a strong and stable relationship between legal origin, investor protection and financial system. A key question the study addresses is how corporate governance rules and the French financial development have changed over time. Our study suggests that indicators related to investors’ rights (shareholders, employees, and bondholders) have been increasing over time, despite the specific legal origin of the French system. On the contrary the creditors’ rights have followed a less clear trend. Our econometric investigation is fairly new as the Law and finance literature has not until now provided corporate governance indicators suitable for French legislation. From that perspective, our work undergoes a multiple criteria analysis of corporate governance reforms. Following this approach, we suggest that the causality links between changes in the French legal environment and financial growth in France are more bidirectional than unidirectional.
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The civil or Romano-Germanic legal tradition is still dominant worldwide, even if its influence is on the decline. It originates in Roman Law and is essentially based on written codes. It is possible to distinguish three large families: the French tradition, German and Scandinavian. The Anglo-Saxon tradition or Common Law is found most notably in the United States, the United Kingdom, Canada, Australia, India, etc. This form of Law is mainly based on jurisprudence.
Voigt (2005) stresses that LLSV has become a brand name since 2005. The number of citations, of their work, on the search engine academic “scholar.google.com”, is impressive. Their papers of 1997, 1998 and 1999 have been cited respectively by 1105, 1483 and 447 papers.
EXIT represents the exit rights conferred on shareholders (like the right to sanction decision-makers by selling their shares). These exit rights have been considerably improved by the Law of August 2nd, 1989 “Security and transparency in the financial market” that established systems of public offers for withdrawal and obligatory public offerings.
LLSV considered their indicator as exclusive of creditor rights, but it includes a sub-indicator (“Management Does Not Stay”, MNSR) relative to managers.
The intermediation rate in the strict sense compares the amount of credit granted by credit institutions to the total financing of non-financial agents. Conversely, the rate in the broad sense results from an approach bringing together under the term of “intermediated financing” the amount granted to non-financial agents (i) by all the financial institutions (banks, insurance companies, and UCITS). (ii) by the various possible channels (negotiable short-term debt securities, bonds and shares).
Within the framework of a joint research project by the Deutsche Bundesbank and the Banque de France.
The data is taken from the National Accounts (“Reports on the accounts of the nation” 2003).
For INSEE, the data is taken from the National Accounts (“Reports on the accounts of the nation” 2003). For the Banque de France, the data come from “Statistics and Surveys”: http://www.banque-france.fr/fr/statistiques/base/base.htm.
The data come from OECD. They cover life and non-life insurance companies, investment firms, which are made up of Undertakings for Collective Investment in Transferable Securities (UCITS), and pension funds. See: “Annuaire Statistique Investisseurs Institutionnels” (http://www.oecd.org/document/), “Survey of Corporate Governance Developments in OECD Countries” (www.oecd.org/dataoecd/58/27/21755678.pdf), “Corporate Governance Principal of OECD” (www.oecd.org/dataoecd/32/19/31652074.pdf).
Such capital equals the amounts collected by the company from its initial public offering.
The values of this variable are obtained by coumputing the annual changes of series of data on market capitalization provided by Euronext Paris. The primary market, is the market upon which the biggest companies are traded.
This figure illustrates the impact of the Law of July 2nd, 1996 (modernization of financial activities) and of the Law of August 1st 2003 (creation of a single and independent market authority (Autorité des Marchés Financiers) combining the powers of the Stock Exchange Operations Commission (Commission des Opérations de Bourse) and the Financial Market Council (Conseil des Marchés Financiers)).
L = the number of lags. It is chosen in order to have the best significance between the two time-series.
The Augmented Dickey Fuller (ADF) tests confirm that the financial series are not stationary. These three series have been made stationary by differentiating them once. For their part, the legal series have been log-linearized with the exception of the variables FINANCIAL, CR-EANTE, CR-EXPORT ET CR-ANTIMANAGE, which are stationary in level.
The variables SALARIES, SALARIE_INV, BONDINFORMATION, BONDFINANCIAL, BONDVOTE and BONDPROPRIETARY are not stationary: they show a trend and are therefore integrated by order 1. The differentiation makes it possible to make them stationary by eliminating the effect of the trend. We cannot, however, use these series in the first differentiation because they include, due to their method of construction, several null values corresponding to the years with identical scores. In other respects, the series transformed by carrying out an exponential smoothing are stationary in the first differentiation. Smoothing methods reduce; short-term fluctuations of the series. The series representing the share of convertible debentures in the total of capital (CONVBOND) being stationary in level, the Granger test is thus applied to this series without transformation. It is the same for the CAPITALIZATION series, representing the annual development of market capitalisation on the primary market.
The results of stationarity test indicate that the series following the development of shareholder rights indicators (INFORMATION_wg, VOTE_wg, FINANCIER_wg, ANTIBLOCK_wg and EXIT_wg) with the exception of ANTIMANAGE_pr. As before, we have transformed these series by loglinearizing them. The series representing the protection of creditors (CR_EXANTE_wg, CR_EXPOST_wg, CR_ANTIMANAGE_wg) are stationary in level.
This link probably reflects the legislators’ willingness to promote the concept of employee shareholding.
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Blazy, R., Boughanmi, A., Deffains, B. et al. Corporate governance and financial development: a study of the French case. Eur J Law Econ 33, 399–445 (2012). https://doi.org/10.1007/s10657-011-9244-9
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DOI: https://doi.org/10.1007/s10657-011-9244-9
Keywords
- Corporate governance
- Investor protection
- Financial development
- Causality
- Law and finance
- Multi-criteria approach