Law and Finance in Transition Economies By: Katharina Pistor, Martin Raiser, Stanislaw Gelfer

Part 1: Introduction

Purpose of the paper To examine right of shareholders and creditors in transition economies Ability of firms to raise external finance. There has been an evolution on thinking about financial laws

Reasons for Protection Stock Market Development More minority positions available in businesses The reverse also holds for this

Corporate Sector in Trans. Economies Poor corporate governance is observed External finance is necessary Businesses are using groups to lower risks Minority shareholders and managers v. boards

Laws and Enforcement Distrust by economic agents Lack of resources in transition economies Enforcement is nearly as important as law

Laws and Enforcement Distrust by economic agents Lack of resources in transition economies Enforcement is nearly as important as law

Part 2: Key Problems

Central Planning Problems of financial discipline and problems in monitoring Government funding went away after reforms Left external investors skeptical

Three Big Problems Absence of external finance to replace state Entrenched incumbent managers Remaining state influence in businesses

Market Capitalization Progress

Part 3: Shareholder and Creditor Rights

Shareholder Rights Voting by mail Share depositing Voting rights and representation Legal action possible Ability to call meetings Minority protection rights

Indexes of Shareholder Rights VOICE EXIT ANTI MANAGE / ANTI BLOCK SMITEGR

Indexes of Creditor Rights CREDCON COLLAT REMEDY Catch up has taken place

Part 4: Effectiveness

What is Effectiveness? The problem with the indexes Compliance and punishments both needed.

Three More Indexes Rules of Law Index Effectiveness Index Enforcement Index

Some Key Findings Big differences in transition economies Lots of variation in rule of law index Correlation coefficient results

Part 5: Law, Legality, and Finance

Some Key Findings Some popular measurements EF = Const + a*law + b*legality + c*controls + u

Table of Results

Table of Results Continued...

Conclusion

Summary Radical improvements do not fix everything Book regulation is not enough Enforcement remains a critical component