TY - JOUR AU - Beck, Thorsten AU - Demirguc-Kunt, Asli AU - Levine, Ross TI - Law and Finance: Why Does Legal Origin Matter? JF - National Bureau of Economic Research Working Paper Series VL - No. 9379 PY - 2002 Y2 - December 2002 DO - 10.3386/w9379 UR - http://www.nber.org/papers/w9379 L1 - http://www.nber.org/papers/w9379.pdf N1 - Author contact info: Thorsten Beck Cass Business School City University London 106 Bunhill Row London EC1Y 8TZ UK E-Mail: Thorsten.Beck.1@city.ac.uk Asli Demirguc-Kunt The World Bank 1818 H Street Washington, DC 20433 E-Mail: ademirguckunt@worldbank.org Ross Levine Haas School of Business University of California at Berkeley 545 Student Services Building, #1900 (F685) Berkeley, CA 94720-1900 Tel: 510-643-1419 E-Mail: Ross_levine@haas.berkeley.edu AB - New research suggests that cross-country differences in legal origin help explain differences in financial development. This paper empirically assesses two theories of why legal origin influences financial development. First, the political' channel stresses that (i) legal traditions differ in the priority they give to the rights of individual investors vis-…-vis the state and (ii) this has repercussions for the development of property rights and financial markets. Second, the adaptability' channel holds that (i) legal traditions differ in their ability to adjust to changing commercial circumstances and (ii) legal systems that adapt quickly to minimize the gap between the contracting needs of the economy and the legal system's capabilities will foster financial development more effectively than would more rigid legal traditions. We use historical comparisons and cross-country regressions to assess the validity of these two channels. We find that legal origin matters for financial development because legal traditions differ in their ability to adapt efficiently to evolving economic conditions. ER -