Legal Theories of Financial Development

Abstract

This paper examines legal theories of international differences in financial development. The law and finance theory stresses that legal traditions differ in terms of (i) their emphasis on the rights of private property owners vis‐à‐vis the state and (ii) their ability to adapt to changing commercial and financial conditions, so that historically determined legal traditions shape financial development today. Other theories reject the centrality of legal tradition in accounting for cross‐country differences in financial development. The results are broadly consistent with legal theories of financial development, though it is difficult to identify the precise channel through which legal tradition influences financial development.