Prepared for World Justice Forum, Vienna July 2-5 2008
Law, Finance and the First Corporations
The English East India Company (EIC) and the Dutch East India Company (VOC) were incorporated by State charters two years apart, in 1600 and 1602 respectively. They were involved in similar business activities, oceanic trade in high value goods between Europe and Asia, via the Cape Route. They were both organized as joint stock corporations, with huge capital and hundreds of shareholders. In fact they were by an order of magnitude the largest business corporations of their era. The formation of the companies was situated in a crucial junction in the history of business organizations and stock markets. Yet, while the formation of the VOC led to the appearance of a secondary market in shares in the Dutch Republic, in England a share market emerged only a century after the organization of the EIC.
The present article shall focus on a main organizational challenge faced by the two companies, the facilitation of long-term impersonal cooperation between active entrepreneurs and passive investors. It will study of the manners by which legal and political environmental factors were translated into the detailed financial and governance structure of each of the two companies. It will explain the distinct English and Dutch paths to the creation of share markets through these environmental and organizational differences.
My approach and case study will be encountered with three influential, theoretically oriented, approaches to the relationship between law and institutions and the development of the stock market. The approaches are those of Schleifer and his collaborators (hereafter LLSV) that emphasize the effect of legal origins on investor protection, of North and Weingast that view the ability of the State to convey credible commitments as a key to the development of stock markets and of Rajan and Zingales that focus on market infrastructure and on the power of social and interest groups. The purpose of this encounter is twofold; first, to enrich our understanding of the reasons for the historical divergence between the two countries; and second, to analyze these leading theories in light of the empirical findings of our pivotal case study.
The article will first communicate with the three abovementioned approaches in order to extract from them direct arguments and implicit predictions with respect to the historical case
1 Professor of Law and Legal History, Tel Aviv University (firstname.lastname@example.org).
I would like to acknowledge the research assistance of Kobi Ben-Zvi and Eyal Yaacoby and the financial support of the Cegla Center, Tel Aviv University. I would like to thank Robert Cooter, John Drew, Jesse Fried, Yarida Gonzales de Lara, Avner Greif, Santhi Hejeebu, Ella Jager, Bruce Johnsen, Lynne Kiesling, Naomi Lamoreaux, Walter Licht, Joel Mokyr, Dan Raff, Jean-Laurent Rosenthal, Harry Scheiber, Kenneth Sokoloff, Daniel Waldenstrom, Dean Williamson, Bill Whitney, Gavin Wright and participants in seminars at George Mason and UC Berkeley, UCLA, Northwestern University, Stanford University, the Wharton Business School, Tel Aviv University, Harvard Business School, Hebrew University and World Justice Forum for their helpful comments and suggestions on earlier versions of this paper and on the related paper on the formation of the EIC.