Law, culture, financial market development and global investment strategy: Lessons from the Middle East and North Africa.

  • Bayan Arqawi

Student thesis: Doctoral Thesis


This thesis consists of two essays that address the intersection of law, culture and finance. The ‘Law and Finance’ theory is augmented to account specifically for the historical complexity in legal origin and the variability of legal structure that exist in the Middle East and North Africa (MENA). The underlying theme throughout this thesis focuses on the role that law and culture play in shaping financial markets and global investment opportunities. How the legal environment and the prevailing Islamic culture shape financial market development in the MENA region is the subject of Essay 1. This is followed by an analysis of the determinants of US mutual fund investment in MENA firms in Essay 2.
The first essay examines how the legal rules protecting creditors and shareholders, law enforcement, judicial efficiency, legal duality and the prevailing Islamic culture influence the development of credit and stock markets in 21 MENA countries for the period 2007-2012. The results from OLS and bootstrap regressions show that the availability of more credit information and the quality of the collateral and bankruptcy laws are critical in the development of credit markets, whereas, disclosing self-dealing transactions and protecting minority shareholders advance stock market development. However, stock market development is deterred when shareholder protection mechanisms allow aggrieved shareholders to sue for self-dealing transactions or access to information to examine self-dealing. Not only does the quality of the legal rules matter, but also the extent of its enforcement is a strong determinant of financial market development. Additionally, the judicial efficiency in resolving commercial disputes marginally benefits financial markets. The duality in MENA legal systems creates investment uncertainty that dampens financial market development. Countries with less Islamic endorsement in their institutions operate more advanced financial markets.
The second essay investigates whether US mutual fund investments in MENA firms are influenced by the quality of the legal environment and financial market development as predicted by the ‘Law and Finance’ theory. Using the investments of 438 US mutual funds in 7,986 locally listed firms in 11 MENA countries for the period 2008-2012, the logistic and tobit regression results reveal that reducing information asymmetry is key to attracting US mutual fund investment. Well-developed stock markets and the existence of shareholder protection mechanisms related to information disclosure quality are both positively associated with US mutual fund investment. However, remedial shareholder protection mechanisms in the form of ease of litigation and the ability to hold directors liable for misconduct are not associated with US mutual fund investment. Empirical evidence also suggests that MENA firms may overcome the legal environmental shortcomings by signalling quality to foreign investors through adopting IFRS or via appointing a ‘big-four’ auditor.
Overall, these two essays contribute to the ‘Law and Finance’ literature. Countries with complex legal systems require a more exacting legal characterisation beyond the historical narrative or legal origin. Further, only ‘pre-emptive’ shareholder protection mechanisms related to the disclosure of self-dealing attract foreign capital and promote stock market development. Finally, culture should not be overlooked as a determinant of financial market development as culture reflects attitudes and norms not easily detectable and quantifiable in the law.
Date of Award2016
Original languageEnglish
SupervisorLi-Anne Woo (Supervisor), Laurie Prather (Supervisor) & M T Spence (Supervisor)

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