Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 1/2007:
Phoenix rising: Legal reforms and changes in valuations in Finland during the economic crisis

Timo Korkeamäki (), Yrjö Koskinen () and Tuomas Takalo ()

Abstract: Finland experienced an extremely severe economic depression in the early 1990s. In the midst of this crisis, significant new legislation was passed that increased supervisory powers of financial market regulators and reformed bankruptcy procedures, significantly decreasing the protection of creditors. We show that the introduction of these new laws resulted in positive abnormal stock returns. The new laws also lead to increases in firms’ Tobin’s q, especially for more levered firms. In contrast to previous studies, our results also suggest that public supervision of financial markets fosters rather than hampers financial market development.

Keywords: corporate governance; bankruptcy; financial supervision; shareholder protection; creditors’ rights; corpo-rate valuations; political economy; (follow links to similar papers)

JEL-Codes: G34; K22; (follow links to similar papers)

39 pages, January 19, 2007

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