Law, ﬁnance, and the ﬁrst corporations
The English East India Company (EIC) and the Dutch East India Company (VOC) were incorporated by state charters two years apart, in 1600 and 1602 respectively. They were involved in similar business activities, oceanic trade in high value goods between Europe and Asia, via the Cape Route. They were both organized as joint stock corporations, with huge capital and hundreds of shareholders. In fact they were by an order of magnitude the largest business corporations of their era. The formation of the companies was situated in a crucial junction in the history of business organizations and stock markets. Yet, while the formation of the VOC led to the appearance of a secondary market in shares in the Dutch Republic, in England a share market emerged only a century after the organization of the EIC. The present chapter focuses on a main organizational challenge faced by the
two companies, the facilitation of long-term impersonal cooperation between active entrepreneurs and passive investors. It will study the manners by which legal and political environmental factors were translated into the detailed ﬁnancial and governance structure of each of the two companies. It will explain the distinct English and Dutch paths to the creation of share markets through these environmental and organizational diﬀerences. My approach and case study will be encountered with three inﬂuential,
theoretically oriented approaches to the relationship between law and institutions and the development of the stock market. The approaches are those of Schleifer and his collaborators (hereafter LLSV) that emphasize the eﬀect of legal origins on investor protection, of North and Weingast that view the ability of the state to convey credible commitments as a key to the development of stock markets, and of Rajan and Zingales that focus on market infrastructure and on the power of social and interest groups. The purpose of this encounter is twofold; ﬁrst, to enrich our understanding of the reasons for the historical divergence between the two countries; and second, to analyze these leading theories in light of the empirical ﬁndings of our pivotal case study. The chapter will ﬁrst communicate with the three above mentioned
approaches in order to extract from them direct arguments and implicit
predictions with respect to the historical case that I am studying. It will next survey the development of government-bond markets in the Netherlands and England. It will then analyze the raising of capital by the EIC and VOC in the primary market, after that explain the emergence of a secondary market in company shares in the Dutch Republic and the absence of such a market in England for another century, and ﬁnally conclude from the history, theory and policy viewpoints.