Law, finance, and economic growth

This paper examines how the legal environment affects financial development, and then asks how this in turn is linked to long-run economic growth, Financial intermediaries an better developed in countries with legal and regulatory systems that (I)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. The data also indicate that the exogenous component of financial intermediary development-the component defined by the legal and regulatory environment-is positively associated with economic growth. Journal of Economic Literature Classification Numbers: G21, K12, O16 (C) 1999 Academic Press.