Calls for tighter financial regulation are gathering momentum in the wake of the global financial crisis. In a setting where corporate innovation imposes positive and negative externalities, the social impact of corporations depends on the sharing rule between the owners of a corporation and the non-financial claimants. We examine the role of law, regulation and institutions in altering this sharing rule. We propose a framework where the social planner puts in place a system of laws, organizational forms, and taxation within which private firms optimize without invasive regulation. Since the legal regime affects the extent to which corporate owners are held responsible for the negative externalities they impose, unlimited liability may discourage innovation in strong legal regimes. Limited liability, however, might be accompanied by excessive innovation. We highlight the role of the government in altering the sharing rule due to its claim through corporate taxation and investigate the relation between law and corporate taxation.We show that the equilibrium corporate tax rates are a decreasing function of legal effectiveness in the embedding economy. Some preliminary empirical evidence is provided in support of this relationship using cross-country data on corporate tax rates and measures of legal effectiveness.This seminar will take place at Duisenberg School of Finance