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Some legal regimes leave gaps in the protection provided by the law to firm investors. This paper considers the
decision by a firm to opt out of the law and bridge those gaps using contracts. Examining the charters of a sample
of Mexican firms, we find that private firms often enhance significantly the protection offered by the law to their
investors, but public firms rarely do so. Motivated by these findings, we construct a model that endogenizes the
degree of investor protection that firms provide, using as springboard the assumption that legal regimes differ in their
ability to enforce what we call precisely filtering contracts, namely, contracts that provide protection only in those
cases where expropriation can occur. Our model generates predictions about the types of contracts that would be
employed and the levels of investor protection that they would provide across different legal regimes in both private
and in public firms. |
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