We control for the general quality of the legal framework using the variable “Rule of Law” from the International Country Risk Guide (columns 2 and 5 of the upper panel and column 2 of the lower panel). Takeover laws may not have a specific causal effect on stock markets on their own, but only proxy for the overall level of legal development in the country. Countries with well-functioning courts and a high general level of law and order will perforce have better developed markets. Failing to control for the general rule of law will permit the entire effect of good laws to be attributed to takeover laws alone, overstating their significance. Using alternative measures of the quality of laws renders similar results. Controlling for the overall quality of laws actually increases the effect of takeover provisions on capital market development, while leaving the significance of the takeover law coefficients undisturbed.

Columns 3 and 6 of the upper panel and 3 of the lower panel explore further the question of which specific laws matter. For that purpose, the regressions introduce the La Porta et al (1998) variable, anti-director rights, which measures the extent of overall minority investor protection in a country, across 49 countries around the world.<sup>64</sup> The close relationship between some of the components of the anti-director rights and the takeover law indices creates collinearity problems which biases the coefficients and impairs their interpretation. More complex analyses are needed to carefully avoid this problem (such as ridge regression), which falls beyond the scope of this paper. Here, we will limit ourselves to noting that investor protection has a positive and largely significant effect on market development. When the general investor protection measure is included, the takeover index remains significant.

All regressions control for the level of country development, since it is a well-established fact that more developed countries boast more active and well-functioning capital markets. Including the level of country development in the regression avoids attributing to takeover laws the beneficial effect of high national income on capital markets. The control variable is the natural logarithm of income per capita (Atlas method). The regressions show that it has a positive and significant effect on market development (PPP income measures deliver identical results). These and all further tests have been repeated without the US, as well as with the variation of measuring the mandatory offer component of the takeover index as an indicator dummy. The results are not materially affected by those alternative specifications.

In sum, Table 6 shows that takeover laws have a considerable and economically important effect on market development, and are beneficial for minority investors by helping them share some of the value released during acquisitions. This effect is robust to the general level of national economic development, as well as the overall quality of the legal system. Moreover, the effect is specific to takeover laws, and cannot be attributed to the investor protection provided in other legislations relevant to corporations and capital markets.

Table 7 relates takeover laws to measures of the value of corporate control and the takeover premium. Stricter takeover laws are found to have a significant negative effect on the private benefits of the controlling corporate owner (columns 1-4), showing that indeed takeover laws do help share some of the corporate value with minority shareholders. This is especially important in emerging markets, where other mechanisms of transmitting value to minority 20