Ratio Working Papers,
The Ratio Institute

Abstract: We propose that the legal origin explanation of differences in financial indicators lacks the ability to satisfyingly describe investment performance and firm size effects. In this paper we investigate the impact of legal origin and firm size on investment performance for 20 111 firms in 58 countries between 2001 and 2010. Anglo Saxon (common law), German, French as well as Scandinavian (civil law) variants of legal systems are covered by the countries included in the study. In addition, we include a category of “old socialist countries”. We find little support for the supposed superiority of common law systems over civil law systems. In fact, the average investor performance is lower in the Anglo Saxon countries than countries with German and Scandinavian legal origin, yet higher than in French legal origin and old socialist countries. Even though limit to firm size is frequently discussed in the theoretical literature there are few empirical studies addressing this issue. In this study we specifically investigate how investment performance is affected by increasing size. We find that irrespective of legal origin a negative impact of firm size appears after a threshold size has been passed.

Keywords: Corporate governance; firm size; legal origin; marginal q

JEL-codes: C23; G30; L25

27 pages, May 29, 2012

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