The Effect Of Legal Environment On Finance

When we compare the financial systems between developed countries, we can find there have much difference in the financial structure and the level of financial development. For example, the United Kingdom and the United States have very well-developed securities markets, while Germany maintains very large and powerful banks. When economist discussed this phenomenon, they mainly interpreted it from bank-based or market-based in a long time. In 1998, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny, who come from Harvard University and the University of Chicago, introduced the legal system into the study of financial development and designed a set of indicator to quantify the legal system. Thus the Law and Finance became a new field of research. The "Legal Origin Theory" argued by LLSV can be used to explain the variation in financial development between different countries to a certain extent. After twenty years of development, research in this area has achieved fruitful results.China has made great achievements in economic development after 30 years’ reform and open to the outside world. By contrast, the development of Chinese financial market development is backward. There are many structural problems in Chinese financial market, and many factors restrict its reform and development further. The process of building the rule of law in China is an important factor which can’t be ignored in these factors. These achievements in the "Law and Finance" could provide a new perspective for the reform and development in Chinese financial sector.This dissertation focuses on both macro and micro aspects. It introduces relevant theoretical models, and uses the data about Chinese both provincial level and listed companies to test empirically whether the improvement of the level of the legal protection for creditors and investors is able to promote the development of financial intermediation markets and affect the behavior of companies’ decision-making.The first chapter is the introductory section, which introduces the research background of the topic, the main significance of the study, the basic framework, research methods and the innovation of the dissertation.The second chapter is the literature review section, which mainly reviews many achievements in the field of law and finance. Firstly, this chapter reviews the "Legal Origin Theory" argued by LLSV. Secondly, reviewing other research about the legal system and financial development on the macro level; thirdly, reviewing empirical literatures at the micro level which study how the legal system affect the behavior of company. Then, introducing views which criticize the law and finance theory; thereafter introducing the research about the law and finance theory in China. Finally, it ends with the brief summary of the existing literature.The third chapter studies the relationship between the environment of legal system and the financial intermediation sector’s development at the macro-level. This chapter analyzes the mechanism how the environment of legal system affects the credit market development firstly. Then, it achieves some relevant conclusions:the improvement of the legal system can promote the development of credit markets, but also increase the average default rate. Then, based on the theoretical analysis, it uses the panel data of 31 areas in China from 1997 to 2009 to test the model’s conclusions empirically. The results show that the improvement in the environment of regional legal systems is conducive to the development of regional financial intermediation sector.The fourth chapter has investigated the environment of legal system’s effect on corporate financing behavior from the micro level. This chapter analyzes the micro decision-making mechanism how the environment of the behavior of corporate financing, then draws relevant conclusions of the study:firms located in the area with better legal environment face a lower external financing cost, and their scale are larger. Then take advantage of the micro-data of Chinese listed companies in Shanghai and Shenzhen stock markets to test the model’s conclusions empirically. The empirical results show that the improvement of the legal environment also can promote firms’ development, and affect firms’ financial decision-making behavior on the micro level.The fifth chapter summarizes the major conclusion of this dissertation, proposes some policy advices, and notes the inadequacy of this dissertation and possible research direction in future.