Market Mobilised Capital, Legal Rules and Enforcement

Stephen, Frank H and van Hemmen, Stefan (2004) Market Mobilised Capital, Legal Rules and Enforcement. Discussion paper. University of Strathclyde, Glasgow.

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A number of authors have used these measures of legal institutions in work which relates growth or development to the existence of a healthy financial sector which is in turn a function of legal institutions. This has become known as the ‘Law and Finance’ literature. King and Levine (1993), Levine (1999), Levine and Zervos (1998) and Levine (2003) demonstrate the relationship between growth and various measures of the financial sector. Levine (1999) extends this to show that the measures of financial sector development are themselves functions of creditor protection laws, the risk of government contract modification and accounting regulations. The latter are however seen primarily as instrumental variables to overcome the endogeneity of the financial sector variables. Levine (2003) extends this to an analysis of stock-market development and shareholders' rights. Azfar, Matheson and Olson (1999) as part of a programme on 'market augmenting government' developed the concept of 'Market-Mobilised Capital' (MMC) which they claim plays a central role in economic growth. MMC is the sum of stocks of debt and equity as a proportion of GDP. Azfar and Matheson (2003) in a development of this work deal with issues of endogenity and causality by the use of measures of investor protection, creditor protection and enforcement of laws as instruments on market mobilised capital. The present paper seeks to extend the work reported in Azfar and Matheson (2003) on the significance of market mobilised capital for growth by examining more closely the role played by investor and creditor protection laws and their enforcement on the components of market mobilised capital and thus growth.