The majority of investments are viewed as hedges against inflation and as such, investors desire to be shielded from any losses that could prevent them from recouping their investments as well as the accrued profits. Some economic theorists have harped on the sufficiency of private contracting for the protection of investors i.e., they believe that most financial markets rules are unnecessary because issuers and investors are sophisticated enough to cover their bases contractually.
On average, investors are able to recognise their rights to disclosure and proper accounting, which in turn provides them the information they need to exercise other rights. Shareholders have the rights to receive dividends on pro-rata terms, to vote and participate, resubscribe on the same terms and to sue directors or the majority where expropriation and unfairness is perceived. Creditors on their own part have to deal with bankruptcy/reorganisation and the ability to repossess collateral. The argument is that for jurisdictions where the enforcement of laws is shaky, financial contracting would be a more reliable measure of protection.
This perspective is interesting because the enforceability of any elaborate contracts is as crucial as their content, if not more. This fact cannot be taken for granted in most countries, take Nigeria for example. Courts are often unable or unwilling to resolve disputes, slow, subject to political and economic pressures, and even corrupt. Even the most developed judiciaries will need a reliable landing point (in the form of established rules that are protective of investors) to make credible decisions. More so, judges are better positioned to rule on new situations when they can apply general principles of law to specific conduct that has not yet been prohibited. Therefore, the safest way to truly get ahead of risks of fraud or mismanagement is to strengthen the financial markets through regulation.
The legal approach encourages the development of financial markets as investors pay for more securities when they feel safe, making it more attractive for issuers to go to market with these securities. This also applies to both creditors and shareholders. The structure of these rights in law and the effectiveness of their enforcement (through sanctions from exchanges and the SEC, push back from trust fund managers, and poor ratings from credit rating agencies, etc.) will in turn favor lending, develop credit markets and increase the rate of IPO activity.
Investor Protection is manifestly a powerful predictor of the extent of boom or decline the financial markets would face, especially in this period that seems to be ridden with economic crises. I believe that if expropriation on any level can be curbed through regulations, the focus of policy debates will shift from the discussing the macroeconomy in uncertain terms, to facing the governance variables squarely.