Law and Finance Theory

Law and Finance Theory explores how legal systems influence financial markets and economic activity. It examines how laws—like property rights, contracts, and regulations—encourage investment, reduce risks, and promote economic growth. Strong legal institutions provide certainty and enforce agreements, which builds trust among investors and companies. Conversely, weak or unpredictable legal systems can increase transaction costs and discourage investment. Overall, the theory highlights the vital role of legal frameworks in shaping financial behavior, fostering efficient markets, and supporting economic development.