2.4.2 Relation to Other Legal and Economic Variables

This section turns to the relationship between the stringency of ownership disclosure mies and other legal and economic variables. It is difficult to establish whether there is a causal link between the legal mies on ownership disclosure, ownership structure and economic development, since there are likely to be mutual interdependencies between these three factors.1 Therefore, we do not use regression analyses to test for causality. Instead, we focus on correlations between legal and economic variables. Table 8 shows the descriptive data on the relevant variables, and Table 9 presents the correlation between these variables and ownership disclosure mies.

Table 8: Descriptive Data on Other Legal and Economie Variables

Table 9: Correlation between ownership disclosure rules and other variables

Ownership disclosure can be a useful means to protect minority shareholders against controlling shareholders,10 which is why we might expect ownership disclosure mies to be more stringent in countries with concentrated ownership than in countries with dispersed ownership. Indeed, a previous study using the CBR dataset found that in general, minority shareholder protection is stronger in countries with concentrated ownership than in countries with dispersed ownership.11 Interestingly, though, Table 9 shows a positive correlation between countries' degree of dispersed ownership and the stringency of their ownership disclosure mies. This suggests that ownership disclosure mies are not more stringent in countries with concentrated ownership than in countries with dispersed ownership.12

One explanation could follow from the law and finance literature: ownership disclosure rules protect shareholders (and these rules are also positively correlated with other forms of shareholder protection13). Thus, in countries with better shareholder protection, more people may be willing to invest in public companies, which subsequently may lead to more dispersed share ownership.14 The evidence does not provide unanimous support for this theory, however, since it has not been found that the CBR Index matters for fmancial development.15 It is therefore also worth considering the alternative causality story, namely that lawmakers react to particular ownership structures of firrns.

One possibility, then, would be that the relative stringency of ownership disclosure rules in countries with dispersed share ownership could be explained by the fact that in addition to protecting minority shareholders, ownership disclosure can improve market efficiency.16 Countries with dispersed ownership may be particularly concerned with improving market efficiency through stringent ownership disclosure rules, because on average, firrns depend more on outside equity and market efficiency ultimately reduces the cost of capita1.17 Indeed, the recent suggestion by Mary Schapiro, chair of the US Securities and Exchange Commission (SEC), that US ownership disclosure rules may need to be tightened appears to have been based in large part on concerns about capital formation.18

Another possibility is that the higher level of ownership disclosure in dispersed ownership countries can be explained by public choice theory. As noted by Bebchuk and Neeman, lobbying activities may play a key role in the legislative process that determines a country's level of investor protection, since voters usually pay linie attention to investor protection issues.19 Because ownership disclosure functions as an early warring system to management of the target, managers have an interest in lobbying for stringent ownership disclosure rules.20 Indeed, it has been argued that narrow interest group concerns motivated the regulatory process that produced the US ownership disclosure mies back in the 1960s, and that incumbent management had a particularly strong influence.21

Conversely, in countries with concentrated ownership, controlling shareholders may lobby against stringent ownership disclosure mies, because "once companies have raised extemal equity, entrepreneurs have the incentive to weaken investor protection to increase their private benefits."22 This is illustrated by a study of the implementation of the Takeover Directive in continental Europe, which notes that the resulting regulation "appears to favour the subjects more likely to exercise a significant political influence on the rulemaking process" — i.e., entrenched controlling shareholders.23

Table 9 also reports the relationship between ownership disclosure rules and the percentage of foreign-owned firms. On the one hand, one might expect a negative relationship because foreign investors may wish to remain anonymous. On the other hand, transparency might attract foreign investments and therefore one may expect a positive relationship. Indeed, recent surveys among institutional investors show that they consider such transparency important for their investment decisions.24 Our data show, however, neither a strong positive nor negative relationship. This suggests that the extent of foreign investment is related to other factors than ownership disclosure.

Table 9 shows that there is hardly any correlation between the variable for ownership disclosure and the variable for stock market capitalisation. This is consistent with Armour et al.'s finding of no significant positive relationship between the CBR Index and various stock market indicators in the decade to 2005.25

If we were to assume that, as a general matter, shareholder protection does positively impact stock market capitalisation, as the law and finance literature suggests,26 the question would arise as to why our results do not show a positive correlation between the variable for ownership disclosure and the variable for stock market capitalisation. One possible explanation is that in order for ownership disclosure rules to have such a positive impact on stock market capitalisation, they need to be vigorously enforced. Indeed, an empirical study by Pistor et al. on legal change in transition economies from 1992 through 1998 concludes that while transition economies may have high levels of investor protection (as proxied, inter alia, by ownership disclosure rules) on the books, the development of their financial market is constrained by the absence of effective legal institutions.27 The fact that ownership disclosure mies are not always vigorously enforced is illustrated by an empirical study of corporate governance in Central and Eastern European countries: even as most of these countries had set their threshold for disclosure at 5% by 2002, the identity of the ultimate owner was still undisclosed due in part to the laxity in enforcement of disclosure.28

Consistent with these studies, Table 9 indicates that there is no positive correlation between the variable for ownership disclosure and the variable for enforcement of securities law. On this basis, one might conclude that countries that have relatively stringent ownership disclosure mies need not also have relatively intense enforcement. Our results do not provide unanimous support for this conclusion, however, because Table 9 also reveals a positive correlation between the stringency of countries' ownership disclosure mies and the mie of law. Given that there is a strong correlation between countries' mie of law and their level of development,29 this particular finding is consistent with our earlier finding that developed countries, on average, have more stringent ownership disclosure rules.30