Law and Finance: What Matters? Hong Kong as a Test Case

This paper, using Hong Kong as a test case, challenges one conventional theory and confirms another one in law and finance study: (i) legal families in relation to stock market development; (ii) transplant effect of foreign laws. Economists, most notably La Porta and colleagues, allege that common law systems can offer superior investor protection and thereby facilitate the rise of financial markets. Undeniably, the legal system of Hong Kong, which was inherited from England, belongs to the common law family and is widely considered as one of Hong Kong’s advantages. Nonetheless, the high concentration of family ownership among Hong Kong companies implies that its system is not entirely Anglo-Saxon. Moreover, legal scholars, most notably Pistor and colleagues, claim that the import of laws from a developed system (legal transplantation) will have little impact unless there is such a demand in the first place. Interestingly, for Hong Kong, the transformation of a small fishing village in the mid-nineteenth century to a financial service-oriented economy nowadays is an illustration of the existence of demand in corporate and financial laws. By absorbing the nutrients from English legal traditions, American style of intense public enforcement and the flexibility of Chinese family businesses, Hong Kong has successfully established itself as one of the most crucial financial centers in the world.