arose government fiat rather than private contract. The ownership structure and initial charters of privatized Russian companies were imposed by the privatization program, and the companys principal bank lenders were often selected before privatization began. These relationships were not negotiated by outside investors with an eye to their own self-protection Beyond the efficiency justifications for protective corporate law, political goals support strong shareholder protection in emerging economies. Political goals also shape the law of developed economies, but they are more important in economies where capitalism is less firmly rooted. Egregious opportunism or corporate scandals may erode the political legitimacy of private ownership of large firms, as well as support for the market economy generally Even if corporate scandals do not trigger a political maelstrom of populist reaction, they will damage investor confidence in an environment where disclosure is minimal and legal remedies are slow and uncertain. In Russia, for example, a few well-publicized cases of manager mistreatment of shareholders have seriously impaired the willingness of investors, especially foreign investors, to buy shares of Russian firms and surely contributed to the roughly 75%collapse in Russian share prices from summer 1994 through late 1995 Thus, the twin risks of a destructive political reaction to scandal and of investor overreaction to scandal are important negative externalities that become more serious as legal rules allow greater insider discretion. These risks justify stricter controls on abuse-prone activities than would be appropriate in a developed market- doubly so because market and cultural controls on abuse of position are relatively weak in emerging economies A further political justification for protective corporate law emerges in mass-privatized economies such as Russia, where the government has transferred shares to employees or the general public for nominal consideration. Such a privatization program reflects, in part,a political bargain on how to distribute social wealth. The recipients of shares of privatized enterprises expect these shares to have real value. But in Russia, many citizens have beer disappointed by the market value of their shares and the low dividends they receive. If these recipients also come to believe(often correctly) that insiders are getting rich at their expense by expropriating the cash flow of privatized companies, the political bargain will be breached 24 See Julie Tolkacheva, Secret Takeover Unnerves Investors, Moscow Times, Apr. 5, 1995, at 1,2 (reporting that Primorsk Shipping doubled its outstanding shares and sold the additional shares for a nomina price to an affili te controlled by Primorsk nd also that Far Eastern Shipping plans ee, e.g., Boycko, Shleifer Vishny, Voucher Privatization, supra note 16, at 250-5324 See Julie Tolkacheva, Secret Takeover Unnerves Investors, Moscow Times, Apr. 5, 1995, at 1, 2 (reporting that Primorsk Shipping doubled its outstanding shares and sold the additional shares for a nominal price to an affiliate controlled by Primorsk's managers, and also that Far Eastern Shipping plans a similar action); supra note 17 (describing the secret share issuance by Komineft to insiders); infra note 31 (describing Krasnoyarsk Aluminum's erasure of a 20% shareholder from its share register). 25 See, e.g., Boycko, Shleifer & Vishny, Voucher Privatization, supra note 16, at 250-53. 12 arose from government fiat rather than private contract. The ownership structure and initial charters of privatized Russian companies were imposed by the privatization program, and the company's principal bank lenders were often selected before privatization began. These relationships were not negotiated by outside investors with an eye to their own self-protection. Beyond the efficiency justifications for protective corporate law, political goals support strong shareholder protection in emerging economies. Political goals also shape the law of developed economies, but they are more important in economies where capitalism is less firmly rooted. Egregious opportunism or corporate scandals may erode the political legitimacy of private ownership of large firms, as well as support for the market economy generally. Even if corporate scandals do not trigger a political maelstrom of populist reaction, they will damage investor confidence in an environment where disclosure is minimal and legal remedies are slow and uncertain. In Russia, for example, a few well-publicized cases of manager mistreatment of shareholders have seriously impaired the willingness of investors, especially foreign investors, to buy shares of Russian firms and surely contributed to the roughly 75% collapse in Russian share prices from summer 1994 through late 1995.24 Thus, the twin risks of a destructive political reaction to scandal and of investor overreaction to scandal are important negative externalities that become more serious as legal rules allow greater insider discretion. These risks justify stricter controls on abuse-prone activities than would be appropriate in a developed market -- doubly so because market and cultural controls on abuse of position are relatively weak in emerging economies. A further political justification for protective corporate law emerges in mass-privatized economies such as Russia, where the government has transferred shares to employees or the general public for nominal consideration. Such a privatization program reflects, in part, a political bargain on how to distribute social wealth.25 The recipients of shares of privatized enterprises expect these shares to have real value. But in Russia, many citizens have been disappointed by the market value of their shares and the low dividends they receive. If these recipients also come to believe (often correctly) that insiders are getting rich at their expense by expropriating the cash flow of privatized companies, the political bargain will be breached