LEGAL ORIGINS,POLITICS, AND MODERN STOCK MARKETS Mark J.Roe TABLE OF CONTENTS INTRODUCTION 62 I.CONSIDERING LEGAL ORIGINS 468 A.The Classic Differences .469 B.Legal Origins and Financial Progress.. m470 1.Protecting Minority Stockholders via Fiduciary Duties.. ,47I 2.Overregulating Financial Markets..... 473 C.The Differences Erode D.Can Legal Origin Anchor Lw as the Primary Cause? II.STATE POWER AND LEGAL ORIGIN IN THE TWENTIETH CENTURY A.The Rise of the Regulatory State in the Twentieth Century..... .484 B.The Powver of the State... 485 A Timeline of State power in the twventieth century .486 2.Timelines of Government Budgets,Government Transfers,and Financial Market 8 3.Regulating Financial and Labo Market 488 4.Instruments and Power .491 C.Which System Regulates Securities Markets More?... .4Q1 I.Regulatory Budgets..... 40 2.The SEC 493 IIL.REEXAMINING THE DATA:DO POLITICAL ECONOMY DIFFERENCES BETTER EXPLAIN FINANCIAL DIFFERENCES? -494 A.Reexamining Legal Origins as Predicting Ownership Separation in the Wealthy West.... .405 I.Corporate Law,Legal Origin,and Legislative Policy.... 495 2.The World Wars 498 3.Invasions and Military Occupation:The Twentieth Century's Centers of Institutional De on. 499 4.Fighting Communism After the World Wars;Ignoring Capital Markets. -50I B.Politics-Based Theories for the Developed World..... .502 1.Left-Right Labor Politics. 02 2.Incumbent Capital Owners 3.TradeOpenness 4.Median Vote -50 5.Core Similaritie -5o0 6.Britain and Switzerland. .508 C.Reexamining Method:Instrumental Variables and Iterative Development5.1 460LEGAL ORIGINS, POLITICS, AND MODERN STOCK MARKETS Mark J. Roe TABLE OF CONTENTS INTRODUCTION ............................................................................................................................ 462 I. CONSIDERING LEGAL ORIGINS ........................................................................................... 468 A. The Classic Differences ........................................................................................................ 469 B. Legal Origins and Financial Progress ................................................................................ 470 i. Protecting M inority Stockholders via Fiduciary Duties ........................................ 471 2. Overregulating Financial M arkets ................................................................................ 473 C. The Differences Erode ......................................................................................................... 475 D. Can Legal Origin Anchor Law as the Primary Cause? ............................................... 480 II. STATE POWER AND LEGAL ORIGIN IN THE TWENTIETH CENTURY ......................... 482 A. The Rise of the Regulatory State in the Twentieth Century ............................................ 484 B. The Power of the State ........................................................................................................ 485 i. A Timeline of State Power in the Twentieth Century ................................................. 486 2. Timelines of Government Budgets, Government Transfers, and Financial M arkets ......................................................................................................... 487 3. Regulating Financial and Labor M arkets .................................................................... 488 4. Instruments and Power .................................................................................................. 491 C. Which System Regulates Securities M arkets M ore? ........................................................ 491 i. Regulatory Budgets ......................................................................................................... 491 2. T he S E C ........................................................................................................................... 4 93 II. REEXAMINING THE DATA: DO POLITICAL ECONOMY DIFFERENCES BETTER EXPLAIN FINANCIAL DIFFERENCES? ............................................................ 494 A. Reexamining Legal Origins as Predicting Ownership Separation in the W ealthy W est ........................................................................................................................ 495 i. Corporate Law, Legal Origin, and Legislative Policy ................................................. 495 2. The World W ars ............................................................................................................. 498 3. Invasions and Military Occupation: The Twentieth Century's Centers of Institutional Destruction ........................................................................................... 499 4. Fighting Communism After the World Wars; Ignoring Capital Markets ................. 501 B. Politics-Based Theories for the Developed World ............................................................ 502 i. Left-Right Labor Politics ................................................................................................ 502 2. Incumbent Capital Owners ............................................................................................ 505 3. Trade Openness ............................................................................................................... 505 4. M edian V oter ................................................................................................................... 505 5. Core Similarities ..................................................................................................... 5o6 6. Britain and Switzerland ........................................................................................... 508 C. Reexamining Method: Instrumental Variables and Iterative Development .............. 511 460