Protecting Minority Shareholders Pays, New Study Finds

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Dr. Mauro Guillén of Wharton joins Dr. Laurence Capron of INSEAD in publication of paper titled, “State Capacity, Minority Shareholder Protections, and Stock Market Development”

Dr. Mauro Guillén, University of Pennsylvania’s Wharton School professor and Director of the Lauder Institute has joined Dr. Laurence Capron of INSEAD in an examination of legal protections for minority shareholders. The research, published under the title, “State Capacity, Minority Shareholder Protections, and Stock Market Development” in Administrative Science Quarterly, compares countries with a long history in shareholder protection with countries across Western Europe, East Asia, and, especially, Eastern Europe and Central Asia who have just recently passed new legislation protecting minority shareholders.

Countries like Britain and the United States have had longer standing legal provisions in place to protect the rights of minority shareholders against the actions and decisions of large shareholders and management. As a result, money flowed into the stock market, and capitalization grew vigorously, dwarfing all other markets around the world. Beginning in the 1980s, however, countries in Continental Europe and Asia introduced reforms in their corporate legislation. What drove these changes? Did they result in the growth of the stock market?

Guillén and Capron assembled information on legal protections for minority shareholders in as many as 78 countries since 1970. Their analysis reveals that many countries around the world passed such new rules and regulations in response to a number of factors, including new economic ideas about free markets, imitation of other countries in the same region, emulation of the United States as the global financial leader, and pressures from the International Monetary Fund, which grew eager to induce countries in under financial stress to implement reforms. By the 2010s, the countries in the world with the greatest degree of protection of minority shareholders were Kazakhstan, Russia, Uzbekistan, South Korea, Mauritius, and Poland. This brings into question whether legal reforms protecting minority shareholders are actually enforced and effective, or if they remain largely ceremonial.

Guillén and Capron account for a number of economic and financial variables, conclusively demonstrating that the adoption of legal protections has increased stock market capitalization, trading, and turnover. But they also found that the beneficial effects of such legal provisions are larger when the government has the capacity to enforce them.

In conclusion, Guillén and Capron believe governments should continue to promote minority shareholder rights as an antidote against the abusive use of private information.

With global competition for capital intensifying, having an appropriate legal framework that protects minority shareholders should be at the top of the policymaking agenda. Companies making investments in foreign countries need to carefully consider the extent to which minority shareholder rights are protected whenever they make decisions about floating part of their equity in a foreign subsidiary. Investors seeking global diversification of their portfolios also need to study the international map of shareholder protections before making decisions.

The paper, with the full methodological explanation, is at:

Guillén and Capron have made their data available at:

Dr. Mauro Guillén’s interview with Knowledge@Wharton can be found at:

About the Lauder Institute:
Founded in 1983 by Leonard and Ronald Lauder in honor of their father, the University of Pennsylvania’s Joseph H. Lauder Institute for Management & International Studies provides a fully integrated business education to a new generation of global leaders. The Lauder Institute offers two joint-degree programs that combine the power of a professional credential in business from the Wharton School or law from Penn Law with a master of arts in International Studies. Integrating excellent teaching in tailored arts and sciences coursework with advanced language study and cultural immersion experiences, the joint-degree program at Lauder was the first of its kind and has remained in a class by itself.
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About the Wharton School:
Founded in 1881 as the first collegiate business school, the Wharton School of the University of Pennsylvania is recognized globally for intellectual leadership and ongoing innovation across every major discipline of business education. With a broad global community and one of the most published business school faculties, Wharton creates economic and social value around the world. The School has 5,000 undergraduate, MBA, executive MBA, and doctoral students; more than 9,000 annual participants in executive education programs annually and a powerful alumni network of 94,000 graduates.

About the School of Arts & Sciences:
The School of Arts & Sciences provides a foundation for the scholarly excellence that has established Penn as one of the world’s leading research universities. The School enrolls 6500 undergraduates, admits approximately 250 students each year into its 32 doctoral programs, and offers a wide range of programs for lifelong learning. International studies are a vibrant enterprise at the School of Arts & Sciences. In addition to offering instruction in 50 languages, the school is home to an array of centers, programs and institutes dedicated to the study of world regions and contemporary global issues and conflicts.

As one of the world’s leading and largest graduate business schools, INSEAD brings together people, cultures and ideas to change lives and to transform organizations. A global perspective and cultural diversity are reflected in all aspects of our research and teaching.

With campuses in Europe (France), Asia (Singapore) and Abu Dhabi, INSEAD’s business education and research spans three continents. Our 150 renowned Faculty members from 34 countries inspire more than 1,300 degree participants annually in our MBA, Executive MBA, Specialized Master’s degrees (Master in Finance, Executive Master in Consulting and Coaching for Change) and PhD programs. In addition, more than 11,000 executives participate in INSEAD’s Executive Education programs each year.

In addition to INSEAD’s programs on our three campuses, INSEAD participates in academic partnerships with the Wharton School of the University of Pennsylvania (Philadelphia & San Francisco); the Kellogg School of Management at Northwestern University near Chicago; the Johns Hopkins University/SAIS in Washington DC; the Teachers College at Columbia University in New York; and MIT Sloan School of Management in Cambridge, Massachusetts. In Asia, INSEAD partners with School of Economics and Management at Tsinghua University in Beijing and China Europe International Business School (CEIBS) in Shanghai. INSEAD is a founding member in the multidisciplinary Sorbonne University created in 2012, and also partners with Fundação Dom Cabral in Brazil.

INSEAD became a pioneer of international business education with the graduation of the first MBA class on the Fontainebleau campus in Europe in 1960. In 2000, INSEAD opened its Asia campus in Singapore. And in 2007 the school began an association in the Middle East, officially opening the Abu Dhabi campus in 2010.

Around the world and over the decades, INSEAD continues to conduct cutting edge research and to innovate across all our programs to provide business leaders with the knowledge and sensitivity to operate anywhere. These core values have enabled us to become truly "The Business School for the World."

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Allison Bozniak
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