The Legal and Institutional Preconditions for Strong Securities Markets

Legal and institutional prerequisites for sound securities markets. / Schwarz, Bernard S. A major challenge for all economies, which few have succeeded, is to create the conditions for a strong market for common shares and other securities. A strong securities market is built on a complex web of legal and market institutions that ensure that minority shareholders (1) receive good information about the value of a company`s business and (2) can trust that a company`s management and controlling shareholders will not defraud them of most or all of the value of their investment. A country whose laws and related institutions fail in both cases cannot develop a strong securities market, forcing companies to resort to internal financing or bank financing – both of which have significant flaws. In this article, Professor Bernard Black explains why these two investor protection issues are essential, interrelated and difficult to resolve. It discusses the laws and institutions that are most important to everyone, those laws and institutions that can be borrowed from countries with strong securities markets and those that need to be homemade. Stanford Law School, John M. Olin Program in Law & Economics Working Paper Series.

Stanford Law and Economics Olin Working Paper No. 179 An abridged and earlier version of this article was published as “The Core Institutions that Support Strong Securities Markets,” Business Lawyer, Volume 55, pp. 1565-1607, 2000. This previous article is available at

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