Legal Institutions and Financial Development

Abstract

This paper provides a concise, selective review of research on the role of legal institutions in shaping the operation of financial systems. While a burgeoning literature finds that financial development exerts a first-order impact on economic growth, the law and finance literature seeks to understand the role of legal institutions in explaining international differences in financial systems. Considerable research dissects, critiques, and debates the influence of investor protection laws, the efficiency of contract enforcement, and private property rights protection on the effectiveness of corporate governance, the efficient allocation of capital, and the overall level of financial development. Furthermore, legal scholars, political scientists, historians, and economists are questioning and assessing the importance of historically determined differences in legal traditions in shaping national approaches to investor protection laws, contract enforcement, and property rights. The field of law and finance promises to be a contentious and important area of inquiry in coming years.