Question

The paper states that “For investors, a major challenge is that the majority of the region's companies are small or midsize and family-run. Most have never had an outside investor or applied for a bank loan” Explain these findings in light of the theory of La Porta,Lopez De-Silanes, Shleifer, and Vishny.

Answer 1

It examines legal rules covering protection of corporate shareholders and creditors,the origin of these rules and the quality of their enforcement in 49 countries.The results show that common law countries generally have the strongest
and french civil law countries the weakest ,legal protections of investors,with German and Scandinavian civil law countries located in the middle.We also find that concentration of ownership of shares in the largest public companies
is negatively related to investor protections,consistent with the hypothesis that small,diversified share
holders are unlikely to be important in countries that fail to protect their rights.

La Porta et al. (1997) show that countries with
poor investor protections indeed have significantly smaller debt and
equity markets.

It is often efficient to have some ownership concentration in companies since
large shareholders might monitor managers and thus increase the
value of the firm (Shleifer and Vishny 1986).But with poor investor
protection, ownership concentration becomes a substitute for legal
protection, because only large shareholders can hope to receive a
return on their investment.