Deep and liquid securities markets appear to be an exception to a worldwide pattern in which concentrated ownership dominates dispersed ownership. Recent commentary has argued that a dispersed shareholder base is unlikely to develop in civil-law countries and transitional economies for a variety of reasons, including (1) the absence of adequate legal protections for minority shareholders, (2) the inability of dispersed shareholders to hold control when the private benefits of control are high, and (3) the political vulnerability of dispersed shareholder ownership in left-leaning social democracies. Nonetheless, this Article finds that significant movement in the direction of dispersed ownership has occurred and is accelerating across Europe. What, then, are the legal and political preconditions to the emergence of strong securities markets? Examining the origins of dispersed ownership in both the United States and the United Kingdom during the late nineteenth and early twentieth centuries and contrasting their experiences with the contemporaneous failure of securities markets to develop in Continental Europe, this Article finds little evidence that the existence of strong legal protections for minority shareholders is the explanatory variable that best accounts for the divergent evolution of common-law versus civil-law economies. During this era, particularly in the United States, the private benefits of control were high, controlling shareholders regularly exploited minority shareholders and manipulated markets, and political corruption undercut the effectiveness of those legal remedies that existed. Yet, ownership and control gradually separated in the largest U.S. corporations. The critical factors explaining early market development in the United States appear to have been the private efforts of investment bankers to develop credible bonding mechanisms plus enlightened self-regulation by the New York Stock Exchange. In this light, the decisive difference between the common-law countries, in which securities markets developed, and the civil-law countries, in which they did not, appears to have been less their divergent legal rules than the early emergence of a relatively autonomous and decentralized private sector in the former countries, in which competition could flourish and self-regulation was encouraged. In contrast, market development was impeded in Continental Europe bi pervasive state intervention and a view of the securities marker as an appendage of the state. Ultimately, the correlation between strong securities markets and strong legal standards, seems real, but the causal sequence may be the reverse of that suggested by recent commentators. Rather than strong legal protections engendering strong markets, securities markets appear to develop first through private initiatives and then create political constituencies that demand stronger legal protections. "Crash then law" is a recurring cycle. Hence, although law contributes to market growth and particularly market stability, it appears more to follow than precede economic development.
