The legal and institutional preconditions for strong securities markets

An important challenge for all economies, at which only a few have succeeded, is creating the preconditions for a strong market for common stocks and other securities. A strong securities market rests on a complex network of legal and market institutions that ensure that minority shareholders (1) receive good information about the value of a company's business and (2) have confidence that a company's managers and controlling shareholders won't cheat them out of most or all of the value of their investment. A country whose laws and related institutions fail on either count cannot develop a strong securities market, forcing firms to rely on internal financing or bank financing - both of which have important shortcomings. In this Article, Professor Bernard Black explains why these two investor protection issues are critical, related, and hard to solve. He discusses which laws and institutions are most important for each, which of these laws and institutions can be borrowed from countries with strong securities markets, and which must be homegrown. A shorter and earlier version of this article was published as The Core Institutions that Support Strong Securities Markets, Business Lawyer, Vol. 55, pp. 1565-1607, 2000. This earlier article is available at http://ssrn.com/abstract_id=231120