Building capital markets: a practical perspective
Introduction Using his practical experience in company and securities law reform in a number of developing economies, Professor Bernard Black1 provides a comprehensive analysis of legal and institutional preconditions for establishing strong capital markets. Black has posited that, in order for a country to have strong public securities markets, its laws and related institutions must give minority shareholders good information about the value of a company’s business and confidence that the company’s insiders2 will not “cheat investors out of most or all of the value of their investment through self-dealing transactions or even outright theft”.3 This calls for a complex web of market-supporting laws and institutions to deal with market information asymmetry, insider dealing and other forms of market abuse. It is important to mention at the outset that Black’s analysis is based on the neo-classical economic model of “rational choice”. Black is useful because his work is focused on capital markets as a subject matter and at the establishment of capital markets at a national level. Thus, he is more particular than North in two distinct dimensions. He is interested in a single aspect of development, rather than development overall. He is interested in specific jurisdictions, rather than in factors common across all jurisdictions. In the context of the methodology of this study, Black provides a practical confirmation of North’s propositions. His recommended institutional structures for capital market development by and large do align, as we will show in this chapter, with North’s framework for development. In other words, Black reduces North’s high level and mostly abstract thesis into a palatable and practical framework which can be adopted by policy makers in designing and implementing capital market reforms within North’s framework. It is for this reason that we set out in this chapter to explore the theoretical complementarities between Black’s pre-conditions for strong capital markets and North’s framework for economic development.