Mark Roe has written a fascinating paper at SSRN challenging many of the conclusions of La Porta, Shleifer and others that a common law regime favours the development of stock markets and a civil law regime impedes it.
Roe’s first line of attack is to show empirically that the intensity of labour regulation is a better predictor of financial market development than legal origin. Roe goes on to link this with the devastation that the core civil law countries suffered in the world wars. “Early twentieth century ruin strongly predicts late 20th century financial markets’ strength. It may explain both post-World War II strong labor policy in the devastated nations and the weaknesses of securities markets in the same nations.” Roe has a nice theoretical argument to provide the linkage: “If a nation’s middle class’ financial savings were devastated first by inter-war hyper-inflation and depression and then by war-time destruction of the underlying physical assets, then voters for decades after 1945 could have cared little about financial capital because their well-being was tied more to their human capital. ”
The second line of attack is to deny that modern securities regulation in common law countries has any common law characteristics left anymore. I think Roe is on strong ground here when he says that SEC regulations are more in the civil law tradition than in the common law tradition. People like me who thought that was merit in the common law approach would then have to conclude that the direction in which the SEC has taken securities regulation in the last few decades is a big mistake.
All said, Roe has written a very thought provoking paper