Empirical results of the relation between the minority shareholders protection and equity markets

My thesis examined empirically whether higher levels of legal protection for minority shareholders are associated with equity markets which were larger, more active, and faster in issuing new securities, that is to say equity market development.

Using a sample of 16 MENA countries over the period between 2005-2009, panel data analyses as well as the associated tests for robustness and specification were conducted.  The data was analysed using both an aggregated index and three sub-indexes to measure the level of protection.

Although the aggregated index finds statistically significant moderate influence for the level of minority shareholder protection on equity market’s size (MKAP), activity and liquidity (VTRD and TURN), the results suggest no effect for the level of protection on a firm’s access to external finance as measured by RIPO.  More deeply, the use of three dimensions of shareholder protection – the extent of disclosure index (DI), the extent of director liability index (DLI), and ease of shareholder suits index (SS) – also exhibits mixed and inconsistent results.

These results contribute to the ongoing body of work related to the role played by investor legal protection in developing financial markets. Unlike the previous cross-sectional studies, this thesis carried out panel data analysis using new, precise, and less ambiguous conceptual measures. Moreover, the results address the issue of the lack of a regional focus and use a sample of MENA countries with their unique characteristics in terms of culture, religion, politics and natural resources.

Although, it is difficult to generalise based on the findings, these results provide some support to the ‘Law and Finance’ arguments, and at the same time ratify the different criticisms for LLSV studies (Spamann, 2008), and provide possible explanations and sometimes partial support for recent results of contradicted longitudinal work of Fagernas et al. (2008), Siems and Lele (2007) and Sarkar (2009) as well as the recent Armour et al. (2009) study. The use of the aggregated index of DBR, along with the use sub-indexes, implies that one should account for a wide range of different legal protection mechanisms and norms. Likewise, the researcher’s background and limited experience in different disciplines may also play an important role in understanding the reasons for the diverse results. Furthermore, different weight or partial patterns might be assigned by market players, including the minority shareholders, to different legal protection mechanisms. This may also overlap with misrepresentation/miscoding problems.

-This is an excerpt from my PhD thesis 2012


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