Equity Markets, the Corporation and Economic Development

Economic development depends today on the corporation as a form for doing business. Limited liability is a well-known characteristic of the corporation for promoting risk taking, but also important characteristics are legal personality and equity shielding (sometimes called affirmative asset portioning). At the beginning of the seventeenth century the English East India Company proved the value of the joint stock company as a device for assembling capital even without any of those three characteristics. A legal origins approach to corporate law throws less light on the role of law in promoting economic development than sometimes supposed. Not only is legal origin by definition not a policy option, but even if one were to agree on what the most important substantive legal rules were, enforcement is likely to be more important than substantive law. In any event, securities law is as important as corporate law if the object is to build an economy with widely held shareholdings. Where ownership is concentrated and where a family holds the controlling shares and especially where family members have important management positions (which is a common situation in developing countries), self-dealing resulting in expropriation of the value of minority shareholdings is all too common. Dual class shares and share pyramiding facilitates such self-dealing and are therefore undesirable.