Law, Finance, and Economic Growth

This paper examines the connection between the legal environment and financial development, and then traces this link through to long-run economic growth. Countries with legal and regulatory systems that (1) give a high priority to creditors receiving the full present value of their claims on corporations, (2) enforce contracts effectively, and (3) promote comprehensive and accurate financial reporting by corporations have better-developed financial intermediaries. The data also indicate that the exogenous component of financial intermediary development – the component of financial intermediary development defined by the legal and regulatory environment – is positively associated with economic growth. * Department of Economics, 114 Rouss Hall, University of Virginia, Charlottesville, VA 22903-3288; [email protected]. I thank Thorsten Beck, Maria Carkovic, Bill Easterly, Lant Pritchett, Andrei Shleifer, and seminar participants at the Board of Governors of the Federal Reserve System, the University of Virginia, and the World Bank for helpful comments.