Law and Finance in Emerging Economies: The Case of Germany 1800-1913

By most standards, Britain in the mid-19^th century was not only the preeminent industrial power in the world, but also possessed more developed capital markets than any other country. The probably most widely accepted explanation attributes this gap in financial development to more stringent disclosure requirements and more effective enforcement mechanisms in Britain. The explanatory models, however, are commonly not based on a detailed comparative legal analysis of the regulatory environment, but consider only isolated major reforms. This article constructs a comprehensive time series of the evolving disclosure framework and private enforcement mechanisms during the formative stage of capital markets in Britain and one large emerging economy of continental Europe, Germany. It takes account of alternative regulatory factors that either stymied stock market development or functioned as substitutes for insufficient disclosure regulation and concludes that disclosure and private enforcement did not play a pivotal role in the two countries. Capital markets were already relatively well developed in the UK before demanding disclosure obligations and effective private enforcement mechanisms were introduced, and they remained comparatively underdeveloped in Germany even though the courts were innovative in shaping existing liability provisions so as to render them operational in anonymous markets. Instead, it is submitted that changes to German stock corporation law, as a consequence of which incorporations of public companies became more costly and entailed a higher risk of liability, set German capital markets on a different path from Britain. The article, thus, contributes to the wider debate about the legal determinants of stock market development.