Economic, Political, and Legal Factors in Financial System Development: International Patterns in Historical Perspective

Financial systems are often described either as bank-based, universal, and relational or as marketbased, specialized, and arms-length; and for many years academics and policymakers have debated the relative merits of these different types of systems. This paper inquires into the underlying causes of financial system structure and development. Older theories dictated that financial institutions developed in relationship to the economy's level of development. Newer work has brought political and legal factors to the fore: hypothesizing specific relationships between banking structure and state centralization and between financial development and legal tradition. This study classifies countries by type of financial system, and in doing, indicates that few banking systems fit the extreme paradigms of universal-relationship or specialized-arms length banking. On the other hand, despite several cases of temporary upheaval, and recent widespread movement toward conglomeration, banking system ..

Common stock returns in the pre-WWI Berlin Stock Exchange.

We provide new evidence on the efficiency of the Berlin Stock Exchange prior to World War I, when it ranked among the top few markets worldwide by market capitalization. Using a new set of monthly stock price data for a random sample of German companies between 1904 and 1910, we estimate a typical three-factor model and find that returns relate positively to risk (beta), but that book-to-market ratios enter as well (negatively). Firm size and earnings/price ratio relate positively but weakly to returns. The results indicate that the Berlin market did not suffer from unusually large pricing anomalies; thus, its performance was not substantially different from modern markets. Also supporting the conclusion of market efficiency, a momentum portfolio earns returns not different from zero, on average.Stock market anomalies, Book-to-market, Value effect, Size effect

Corporate Governance Reforms in Continental Europe

The fundamental problem of corporate governance in the United States isto alleviate the conflict of interest between dispersed small shareownersand powerful controlling managers. Classic works like Berle and Means (1932) and Jensen and Meckling (1976) discussed this separation of ownership and control and its consequences. Although some companies in the United States are controlled by large blockholders—for instance, Microsoft, Ford, and Wal-Mart— such firms are relatively few and have thus drawn less attention in the corporate governance debate (Anderson and Reeb, 2003). In contrast, the fundamental problem of corporate governance in continental Europe and in most of the world is different. There, few listed companies are widely held. Instead, the typical firm in stock exchanges around the world has a dominant shareholder, usually an individual or a family, who controls the majority of votes. Often, the controlling shareholder exercises control without owning a large frac-tion of the cash flow rights by using pyramidal ownership, shareholder agreements, and dual classes of shares (La Porta, Lopez-de-Silanes, and Shleifer, 1999). These differences in ownership structure have two obvious consequences for corporate governance, as surveyed in Morck, Wolfenzon, and Yeung (2005). On the one hand, dominant shareholders have both the incentive and the power to discipline management. On the other hand, concentrated ownership can create conditions for a new agency problem, because the interests of controlling and minority shareholders are not aligned. In this essay, we begin by describing the differences in the ownership structure of companies in the three main economies of continental Europe—Germany