the Republic, the balance of powers between classes, and the creation of facilitative institutions by the State. We observed a close link between the legal and political environment and the development and design of the two corporations. The VOC, supported by the State, could lock-in investors and legitimize a hierarchical and oligarchic governance structure. The English company, lacking strong State support, could not lock-in investors, had to provide an exit option at the end of every voyage, to base itself on fully voluntary cooperation and to offer outside investors a more democratic and participatory governance structure. The VOC had to provide the locked-in passive and voiceless investors with an exit option by developing a liquid secondary share market. The VOC offered liquidity that did not amount to withdrawing the initial investment (and in fact even the accumulated profits) while the EIC offered a full withdrawal option. The EIC did not give rise to a secondary share market in England. But it gave rise to a path in which a widely held corporation existed for nearly a century in a pre-share-market setting.
This analysis challenges the existing literature on law and finance in several respects. First of all, it does not conform to LLSV's conclusion that the common law as judge-made law better supports the development of a stock market. Both the bond market and the stock market developed fully earlier, in the Dutch republic, a country that applies continental law, and not in the birthplace of the common law – England. In addition, the markets developed in both countries on the margins of the legal system. They did not develop within core province of judge-made law in England or of civil code based law on the continent. It did not benefit from the allegedly superior mechanisms of change of the common law. It developed out of charters – constitutional and administrative tools. It developed in interaction with merchant law and maritime law, which were not very different on both sides of the Channel.
Secondly, LLSV predict that an active and dominant State, such as the typical continental State, would discourage the development of a share market. We have seen that the Dutch State was much more involved in trade and in the economy than the English State. Was this detrimental as LLSV predicted? This article suggests a mixed bag. On one hand, Dutch State involvement assisted in raising huge sums by contemporary standards. It convinced investors that VOC prospects were good and it locked-in unwary investors.14 State support allowed the VOC to maintain annual voyages to Asia and to fund military operations. The VOC could send more ships than the EIC, to capture larger markets, grow faster and be more profitable (and destructive). But the State support inhibited the development of a more innovative and cooperative institution. In the long run, the inactivity of the English State forced entrepreneurs and investors in England to design an institution that would better protect external investors and would serve as the basis for the modern public corporation. In the present case, LLSV predicted the long-run but not the short to medium term.
Third, North and Weingast are correct in identifying the resolution of the credible commitment problem as a precondition for the rise of a government bond market. They focused on Glorious Revolution England, but nothing in their theoretical analysis rejects the possibility that the Dutch Republic could solve the problem a century earlier even if not through a grand constitutional revolution. They are also correct in predicting a synergy between the development of the bond market and the development of the share market. But the relationship between the two can be refined. The ability of the sovereign to make a credible commitment was only partially relevant for the development of a share market. The creation of stock market infrastructure, to
14 It can be argued, however, that the Dutch Republic was not a typical continental State. It was not an absolute monarchy. For this reason, LLSV's prediction may not apply to the Dutch Republic but can still apply to France or Germany.