Law, endowments, and finance

Using a sample of 70 former colonies, this paper assesses two theories regarding the historical determinants of financial development. The law and finance theory holds that legal traditions, brought by colonizers, differ in terms of protecting the rights of private investors vis-A-vis the state, with important implications for financial markets. The endowment theory argues that the disease environment encountered by colonizers influences the formation of long-lasting institutions that shape financial development. The empirical results provide evidence for both theories. However, initial endowments explain more of the cross-country variation in financial intermediary and stock market development. (C) 2003 Elsevier B.V. All rights reserved.