How 'Law and Finance' transformed scholarship, debate

by Steven Neil Kaplan & Luigi Zingales

Capital Ideas
Spring 2014

It has been 15 years since the publication of “Law and Finance,” the paper Robert W. Vishny, Myron S. Scholes Distinguished Service Professor of Finance, wrote alongside three collaborators who were all at Harvard at the time: Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. In that relatively short space of time, Vishny and his coauthors have helped to transform the study of finance and comparative economics. “Law and Finance” became not only one of the most important papers in finance, but one of the most cited papers in social science overall.

Indeed, the paper has had such influence on subsequent scholarship that its innovation and ambition are not always immediately apparent to researchers who were not immersed in the relevant research in the 1980s and 1990s.

At the time, academic research in finance generally examined securities in terms of what they paid off under different circumstances. Theorists had thought about the various “control rights”—the ability of shareholders to vote on directors’ tenure, and of debt-holders to repossess collateral—that come with securities, but there was little empirical work on the subject. Vishny and his coauthors were among the first researchers to look empirically at the rights that accompany securities, in addition to the cash flows.

That would have been innovative in itself, but “Law and Finance” approached the subject with tremendous breadth, with the team collecting data from no fewer than 49 countries. This breathed new life into comparative economic analysis, which, until the fall of the Berlin Wall, had been dominated by an old literature that compared the functioning of socialist and nonsocialist countries. That had died with the end of the Cold War, but it had not yet been replaced by a new framework for international comparisons that was rigorous and could be tested. As Vishny and his coauthors note in 1998, “Comparative statistical analysis of the legal underpinnings of corporate finance—and commerce more generally—remains uncharted territory.”

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