Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement
Hans Bonde Christensen
University of Chicago - Booth School of Business
University of Pennsylvania - The Wharton School
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
July 31, 2015
ECGI - Finance Working Paper No. 407/2014
Chicago Booth Research Paper No. 12-04
This paper examines the capital-market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation. All EU member states were required to adopt these directives, but for plausibly exogenous reasons did so at different times. We exploit this staggered introduction to estimate causal effects of tighter securities regulation for the population of European firms, and find significant increases in market liquidity. Examining cross-sectional variation, we find larger treatment effects in countries that implement and enforce the directives more strictly. They are also stronger in countries with traditionally stricter securities regulation and a better track record of implementing regulation. The cross-sectional results indicate that the same forces that limited the effectiveness of regulation in the past are at play when new rules are introduced, leading to hysteresis in regulatory outcomes. The findings suggest that harmonizing regulation in countries with different prior conditions can make countries diverge more rather than less.
Number of Pages in PDF File: 70
Keywords: Capital market regulation, Enforcement, Disclosure, Law and finance, European Union, Liquidity
JEL Classification: F30, G15, G18, G30, K22, M41
Date posted: January 23, 2011 ; Last revised: August 7, 2015
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