The Common Law and Finance

The four papers that follow this introduction are lectures that were delivered in Oxford as part of a special series, The common law and finance: perspectives from the bench . 1 In the series, senior judges from four jurisdictions (Hong Kong, Australia, the UK and the US) were invited to reflect on the role of the common law judge in the regulation of commerce and finance. In this introduction, we explain the motivation for the series, provide a synopsis of the papers, highlight some common themes, and identify some areas that might usefully be the subject of further research. The common law judge in the law and finance literature It has now been a little over two decades since the publication of La Porta et al’s seminal “Law and finance” paper, 2 in which the authors sought to compare measures of investor protection across countries and relate differences in levels of protection to the availability of finance. 3 The methodological step that made it possible to explore the latter question, a question of causation that would be expected to be fraught with endogeneity problems, 4 was the decision to classify countries in the sample by legal ‘origin’, or legal family. As the authors explained: 5 “Even if we were to find that legal rules matter, it would be possible to argue that these rules endogenously adjust to economic reality, and hence the differences in rules and outcomes simply reflect the differences in some other, exogenous, conditions across countries … this is where our focus on the legal origin becomes crucial. Countries typically adopted their legal systems involuntarily (through conquest or colonisation). Even when they chose a system freely … the crucial consideration was language and the broad political stance of the law rather than the treatment of investor protections. The legal family can therefore be treated as exogenous to a country’s structure of corporate ownership and finance. If we find that legal rules differ substantially across legal families and that financing and ownership patterns do as well, we have a strong case that legal families, as expressed in the legal rules, actually cause outcomes.”