Capital markets are essential to the growth and development of a country’s economy.<sup>1</sup> First, they channel available funds towards growing businesses (funds may be available from corporate shareholders, domestic and foreign investors, pension funds, banks, insurance companies, or other institutional investors). Second, such markets fill in the gaps left by bank financing, which may not be offered at long maturities and often requires costly and scarce collateral. Equity financing, better than banks, can assume the risk of young fast-growing innovative businesses (such as the challenger airline in Brazil, GOL), which are in need of significant funds, and have grown beyond the self-financing pocket of their owner / entrepreneur, but are too risky for a single bank to finance, and too large for a venture capital firm to engage in. Third, capital markets provide a diversification strategy and growth outlet for key players in a nation’s economy, such as pension funds, which can develop only in the presence of a set of markets that would permit their portfolio to reduce risk and reap returns for the beneficiaries.

Capital markets therefore have been a priority focus of national development strategies in the past 15 years. However, past experience shows that promoting a well-functioning and stable capital market that is effective in raising external financing has been an elusive goal for many countries. Policymakers have emphasized the importance of an appropriate regulatory framework to the successful pursuit of a capital markets development strategy. Two studies in the late 1990s first demonstrated convincingly in a cross-country context that laws and financial markets regulation have a tangible and important impact on markets and financial development (La Porta et al 1997, 1998). A veritable flood of research on the impact of laws and regulations on capital markets followed, further deepening our understanding of the area. In addition to cross-country studies, single-country research has been abundant, often focused on the US or UK, and other OECD countries, and recently complemented by research on Brazil, India, and Russia, on a wide range of capital markets topics including corporate control and takeover issues.<sup>2</sup> Studies confirmed the importance of regulation for development. To name but one example, efficiently functioning legal frameworks were found to encourage firms to use external financing and grow. The literature also uncovered that markets do not react to the promulgated laws, but instead to the first signs of effective enforcement.<sup>3</sup> Securities and corporate regulations present an entangled body of law which has been hard for academics to quantify in sufficient detail in order to study its impact on development and growth.<sup>4</sup> As a result, though we know of the overall importance of laws for financial development, it has been difficult for policymakers and researchers alike to draw specific conclusions on the impact of particular legal provisions. One reason for the paucity of crosscountry studies of specific regulations is the sheer complexity of gathering and systematizing the data. The standard approach has been to identify legal provisions and codify them into quantifiable variables, such as the LLSV six-component anti-director index on investor protection.<sup>5</sup> On acquisition regulation, the sole cross-country index in existence is the Nenova (2001) three-component takeover rules index. The measures of regulations and laws used in such studies are too aggregated, however, and show a general level of legal protection. The measures do not reflect the regulations in detail; rather, they are useful in providing a proxy for the overall quality of capital markets rules. As such, the measures help in showing the importance of regulation and institutions; however, they are less informative on the pros and cons of specific legal mechanisms. Pioneering efforts in delving deeper into the body of law have been provided by World Bank’s Doing Business Report, which codifies specific regulations in cooperation with 2