The image of the public corporation as a firm owned by dispersed shareholders, while control is concentrated in the hands of management, as suggested by Berle and Means (1932), has been shown to be the exception rather than the rule in most countries around the world (La Porta et al., 1999; Coffee, 2001). Different studies document that concentration of ownership shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights (LLSV, 1998; Shleifer and Wolfenzon, 2002). The argument has two facets: first, in countries where outside investors are poorly protected, insiders’ ownership stake should be large in order to ensure the maximisation of shareholder value. Thus, when protection is weak, ownership tends to be concentrated. Shleifer and Vishny (1997) claim that, if legal protection is poor, investors could get more effective control rights by being bigger. In effect, concentration of ownership by one or more large equity shareholders increases legal protection leverage.

Second, when they are poorly protected, small investors might be willing to buy corporate shares only at such low prices that make it unattractive for corporations to issue new shares to the public (LLSV, 1998). Countries with minimal shareholder protection are unable to sell equity to minority shareholders due to the lack of legal protection, therefore creating a concentration of high-level ownership (Shleifer and Wolfenzon, 2002). Hence, the argument that dispersed ownership cannot arise in public firms until a legal environment which protects investors is fully in place; or if investor protection is strong, concentrated ownership need not arise.

Table 9: Findings of La Porta et al. regarding ownership concentration (1998)

Legal origin	Ownership by the three largest shareholders                    Anti-Director 10 largest non-financial domestic private firms                   Rights Means
Common law countries		%43                                                                           4
French origin countries		%54                                                                            2.33
German origin countries		%34                                                                            2.33
Scandinavian origin countries		%37                                                                              3

Source: summarised from LLSV, (1998)

LLSV (1998) measure ownership concentration by computing the total percentage equity ownership of the three largest shareholders for each of the ten largest domestic, non-financial firms in each country of the 49 country sample. As we see in Table 9, the concentration differences between the French and other legal families are statistically significant, although other differences are not. In sum, these data indicate that the French civil law countries which characterised with the least level of shareholders protection have unusually high ownership concentration. These results indicate a strong negative correlation between concentrated ownership, as measured by the combined stake of the three largest shareholders, and the quality of legal protection of investors.

La Porta et al. (1999) also use anti-director scores to examine the ownership structure of the 20 largest corporations in 27 wealthy economies. The three authors ‘LLS’ show that ownership structure of sample corporations, except in economies with very good legal shareholder protection, is highly concentrated.

LLSV (2000b) describe several ways for a major owner to retain control of a firm. One of them is the paramedical structure. In this structure, a holding company owned by the entrepreneur is at the top of the pyramid and controls several subsidiaries. Hence, a chain of ownership relations is created. The main feature of this type of control is to own small fraction of cash flows while having superior voting rights. Cross-shareholdings are another way of maintaining control. In this form, it is very hard for outsiders to gain control of one group firm without buying all of them.

This analysis clearly describes the heart of the logical sequence of the ‘law and finance’ theory: the better the terms of external finance provided by better investor protection is positively related with dispersed ownership, and then lead to broader capital markets. Moreover, the higher the level of investor protection, the more desire is to hold shares and the higher is the valuation of securities as will be discussed in the following section.