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Reforming corporate law in an emerging market

The case of Finland in the 1970s



A sweeping and protracted reform of corporate law took place in Finland in the 1970s. We document how the reform brought significant improvements to investor protection and tightened disclosure rules at the cost of increasing the workload in corporate reporting. To study the economic consequences of the reform we develop a simple coordination game where the effects of investor protection on corporate valuation vary with equilibria. Then, using firm-level daily stock return data, we find that the Finnish stock market generally reacts negatively to news of increased investor protection and workload, whereas news of delays in implementation of reform generate largely positive market responses. These results raise the question of whether stronger investor protection and greater transparency unambiguously promote development of stock markets.