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The Quality of the Legal System, Firm Ownership, and Firm Size

2007; The MIT Press; Volume: 89; Issue: 4 Linguagem: Inglês

10.1162/rest.89.4.601

1530-9142

Luc Laeven, Christopher Woodruff,

Law, Economics, and Judicial Systems

We show that firm size is increasing with the quality of the legal system in Mexico. A 1-standard-deviation improvement in the quality of the legal system is associated with a 0.15–0.30 standard deviation increase in firm size. We also show that the legal system affects firm size by reducing the idiosyncratic risk faced by firm owners. The legal system has a smaller impact on partnerships and corporations than on proprietorships, where risk is concentrated in a single owner. All of the findings are robust to instrumenting for legal quality using historical conditions. By focusing on firms in a single country, the data draw attention to the importance of informal institutions.