the law governing the publicly traded corporation(Aktienrecht). German corporate law is highly mandatory so that case law is virtually absent. Indeed, corporate law textbooks suggest that, because of the scarcity of case law in this area, it is sufficient to read the provisions of the statute(Kubler, 1994) Our third indicator of innovative capacity is legal institutional change. The development of stock markets has been accompanied by the emergence of new lawmaking and law enforcement institutions in the form of regulators, i.e., stock exchanges and state regulators such as the Securities and Exchange Commission(SEC)in the U.s. and the Financial Services Authority(fsa)in the UK (Coffee, 2002a). Recent work attributes the emergence of financial market regulators to the failure of courts to enforce the law effectively enough to deter stock and corporate fraud Glaeser and Shleifer(2003 )argue that this failure in the U. S in the early 20 century is due to the fact that the judiciary was captured by powerful industry groups, which necessitated the creation of a new independent state agent. Pistor and Xu (2003)suggest that, even if courts are impartial, the design of courts as neutral arbiters implies that courts can enforce the law only reactively, i. e, after the victim or a state agent have brought action This limits their capacity to prevent harmful actions from taking place. By contrast, regulators are designed to initiate law enforcement independently, which places them in a better position to prevent harmful actions from occurring. Tentative support for the latter proposition is found in La Porta, Lopez-de-Silanes, and Shleifer(2002), who suggest that According to para. 23 V Aktiengesetz (Law on Joint Stock Companies)all provisions of the law are mandatory, unless explicitly stated otherwise in the law The situation is quite different for closely held corporations( GmbH), for which courts play a very active ole. The reason for the lack of case law governing the Aktiengesellschaft(ag)is widely attributed to the lack of procedural rules that would allow shareholders to take judicial re 1010 the law governing the publicly traded corporation (Aktienrecht). German corporate law is highly mandatory3 so that case law is virtually absent. Indeed, corporate law textbooks suggest that, because of the scarcity of case law in this area, it is sufficient to read the provisions of the statute (Kübler, 1994).4 Our third indicator of innovative capacity is legal institutional change. The development of stock markets has been accompanied by the emergence of new lawmaking and law enforcement institutions in the form of regulators, i.e., stock exchanges and state regulators such as the Securities and Exchange Commission (SEC) in the U.S. and the Financial Services Authority (FSA) in the UK (Coffee, 2002a). Recent work attributes the emergence of financial market regulators to the failure of courts to enforce the law effectively enough to deter stock and corporate fraud. Glaeser and Shleifer (2003) argue that this failure in the U.S. in the early 20th century is due to the fact that the judiciary was captured by powerful industry groups, which necessitated the creation of a new independent state agent. Pistor and Xu (2003) suggest that, even if courts are impartial, the design of courts as neutral arbiters implies that courts can enforce the law only reactively, i.e., after the victim or a state agent have brought action. This limits their capacity to prevent harmful actions from taking place. By contrast, regulators are designed to initiate law enforcement independently, which places them in a better position to prevent harmful actions from occurring. Tentative support for the latter proposition is found in La Porta, Lopez-de-Silanes, and Shleifer (2002), who suggest that 3 According to para. 23 V Aktiengesetz (Law on Joint Stock Companies) all provisions of the law are mandatory, unless explicitly stated otherwise in the law. 4 The situation is quite different for closely held corporations (GmbH), for which courts play a very active role. The reason for the lack of case law governing the Aktiengesellschaft (AG) is widely attributed to the lack of procedural rules that would allow shareholders to take judicial recourse