Academics have questioned the accuracy of the Anti-Directors Rights Index (ADRI) utilised in developing the law and finance theory.109
It was held that ADRI result of 33 of the sample countries used by La Porta ought to be corrected because they are not
105 B. Ahunwan, ‘Corporate governance in Nigeria’ (2002) 37 Journal of Business Ethics 275
106 C. K. Ayo, ‘The prospects of e-commerce implementation in Nigeria’, (2006) 11 Journal of Internet Banking and Commerce
107 S. A. Asongu, ‘Law and finance in Africa’, (2011) African Governance and Development Institute Working Paper 11/009
108 ibid
109 M. Giannetti and Y. Koskinen, ‘Investor protection, equity returns and financial globalization’, (2010) 45 Journal of Finance and Quantitative Analysis; H. Spamann, ‘Law and finance revisited’, (2008) John M. Olin Center for Law, Economics and Business
distributed with significant differences between common and civil law countries.110
As a result of this, the idea that the ADRI values were predetermined by legal origin was rejected.111
In rejecting the result of legal origins, some shareholder protection variable such as the one share-one vote and mandatory dividend were analysed and it was argued that the results do not correlate with the ADRI, as data utilised was inconsistent between countries.112
Furthermore, the legal origins theory has been described as limited because a majority of the indices used only provide a cross-sectional view that described the law as it stood roughly in the second half of the 1990s.113
It is argued that, although the common law systems had stronger shareholder protection between 1995-2005, the civil law systems were catching up with the common law counterparts as the civil system was increasing the level of shareholder protection at a fast rate. Although it should be noted that this was considerably insufficient as the common law possessed the initial advantage.114
In testing the link for an indication of stock market development by virtue of shareholder protection, there is apparently no link both in common law and civil law systems.115
Further criticism of the law and finance theory was generated by the notion that institutions that monitor market activities matter for economic performance. “Institution” in this context is defined as rules of the game where the purpose or function is to minimise transaction costs associated with market activity.116
Additionally, shared beliefs that impart stability and order as well as agents’
110 H. Spamman (n 109) 3 111 ibid
112 ibid
113 J Amour, S Deakin, P Sarkar, M Siems, and A Singh, ‘Shareholder protection and Stock market development: An Empirical test of the legal origins hypothesis’, (2009) 6 Journal of Empirical Legal Studies 350
114 ibid 115 ibid
116 D, North, Institutions, institutional change and economic performance, (Cambridge University Press 1990)
interactions have also been classified amongst institutions that spur economic performance.117
It is also argued that it is wrong to assume that those in power will act in the interest of the public when enacting and enforcing rules as the state is usually composed of agents and coalitions that are pursuing their own interests. 118
In addressing these criticisms, La Porta et al asserted that there has been no substantial rejection of the importance of legal origins in shaping outcomes. The most cogent version of the critique acknowledged the importance of legal origins and the quality of the judiciary as an effect of financial development.119
Furthermore, they argued that the existence of approval and disclosure procedures such as fiduciary duty discourages them in common law countries. In contrast, evidence suggests that the bright line rules of civil law allow corporate insiders to structure legal transactions that expropriate outside investors.120
In relation to the argument that common law judicial decision making powers has the likelihood of leading to unlikely judgments, evidence was presented that shows that flexibility leads to financial development. It has been held that national legal rules protecting investors improve the ability of firms to develop company specific corporate governance mechanisms.121
They stated further that their findings do not indicate that politics is unimportant for either legal rules or economic outcomes, and that politics may provide the impetus for countries to revise their laws and regulations. However, the thrust of the legal origins theory is that such
117 M, Aoki, Towards a comparative institutional analysis, (Stanford University Press 2001)
118 B. Ahlering, and S. Deakin, ‘Labour regulation, corporate governance and legal origin: A case of institutional complementarity?’ (2005) Centre for Business Research, University of Cambridge, Working Paper No.312 3
119 R. La -Porta, F. Lopez-De-Silanes and A. Shleifer, ‘The economic consequences of legal origins’, (2008) Journal of Economic Literature 298.
120 S. Djankov, C. McLeish and A. Shleifer, ‘Private credit in 129 countries’, (2007) 84 Journal of Financial Economics 301, 312
in response to political demands countries will design reforms consistently with legal traditions.
Developing a financial market rests on a number of factors. Investors would be more inclined to invest in a system governed by rules and regulations that provide some protection if issues arise and to a considerable extent, guarantees some rewards back either in form of dividends, etc. This may not be attainable if the market is tainted with corrupt practices or mismanagement. The findings of La Porta et al are well grounded, and this thesis synchronises with most of its findings vis-a-vis investor protection, but notes that this may not generally be applicable to the Nigerian setting, given that there are other factors that have to be taken into consideration and not just provision of laws alone. The next section addresses the theory of politics and finance, which is another reason attributable for the strength of a capital market.