Investor protections and their impact on capital markets

What is it about?

A review of the literature on investor protections and the impact of these protections on capital markets. Our main conclusion: the relative importance or efficacy of minority shareholder voting rights, and remedial (legal) rights available to minority shareholders at preempting expropriation by majority shareholders remain unclear in so far as improvements in capital market efficiency or capital market growth are concerned.

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Why is it important?

In countries within which the legal environment is weak either because laws are not in place or are not enforced, markets are not efficient as they can be, and as such are not as large or liquid as they have potential to be. In such countries, voting and remedial rights conferred on minority shareholders help preempt expropriation by majority shareholders by increasing the barriers to expropriation or the cost of expropriation. If voting rights work better, more of a focus needs to be placed on structuring such rights. If remedial rights are more effective, the focus needs to be on structuring these rights and the development of socioeconomic structures that support such rights. At this point, however, we simply do not know which sets of rights work better at preempting expropriation in countries with weak legal structures.

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