Document Type

Working Paper

Publication Date



Business Organizations Law | Law | Law and Economics


Center for Law and Economic Studies


Center on Corporate Governance


Recent empirical work has found that the private benefits of control differ significantly depending upon the underlying legal system in which the firm is incorporated. In particular, common law systems appear to outperform French civil law systems, but are trumped in turn by Scandinavian civil law systems. This evidence could be read to support the "law matters" thesis first advanced by Professors LaPorta, Lopez-de-Silanes, Shleifer and Vishny, which finds that "common law" legal systems incorporate superior legal protections for minority shareholders and therefore have deeper capital markets and more dispersed ownership. But the apparent superiority of Scandinavian legal systems complicates, and possibly subverts, this analysis, both because Scandinavian legal systems are more "like" other civil legal systems than they are "like" common law legal systems and because Scandinavian law does not encourage private enforcement of law through class actions and similar devices. Hence, an alternative hypothesis suggests itself: social norms in Scandinavia may discourage predatory behavior by those in control of the firm. This paper explores the competing merits of these two rival hypothesis – law versus norms as instruments of social control – by comparing the private benefits of control in various countries to other benchmarks, such as rates of criminal victimization. Although it finds no universal pattern, some strong congruences are discernible within particular legal systems (i.e., Scandinavian crime rates are very low, as are the private benefits of control that controlling shareholders expropriate from Scandinavian firms). A revised hypothesis is thus suggested: crime rates and the private benefits of control are the lowest in countries having the highest level of social cohesion and the lowest level of recent social and political disruption. This explanation works well for countries with crime and high private benefits of control (e.g., Russia, Mexico, and Brazil), but less well for many common law countries (such as the U.S.) in which the private benefits are low, but crime is high.

One implication of this comparison is that the impact of norms may be greatest when law is the weakest. This possibility may explain best why behavior within Scandinavian firms is different from that in French civil law firms, when both share relatively weak legal rights.