Legal Capital, Financial Information and Net Assets : A Reply to Francesco Denozza (Capitale Sociale, Informazione Contabile E Sistema Del Netto: Una Risposta a Francesco Denozza)

This article is a reply to an essay in defense of the legal capital doctrine published in 2002 by Francesco Denozza as a response to Enriques and Macey's article against the European legal capital rules. After showing that the legal capital doctrine is being eroded by reforms both at the EC and at the national level, the article criticizes Denozza's arguments in favor of legal capital: the presence of information asymmetries between creditors and their corporate debtors and of agency problems within the firm, the fact that there will be a suboptimal production of contractual devices protecting creditors as a class, and the idea that there should be some form of early warning system for companies on the brink of insolvency are not enough to justify legal capital rules, once their costs are taken into account. The paper concludes that the legal capital doctrine, if it is not to remain (or become) a mere vestige of itself, ie. if it imposes meaningful net assets requirements for the set-up and operations of companies, is a socially and economically conservative policy: it favors new ventures backed by wealthy families and/or incumbent companies, it raises barriers to entry in the product markets, and it makes it easier to finance industries requiring investments in real assets than those based mainly on human capital, ie. it favors the least dynamic sectors in today's economy