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
December 31, 2013
ECGI - Finance Working Paper No. 407/2014
Chicago Booth Research Paper No. 12-04
This paper examines the economic 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 two directives, but did so at different points in time. Our research design exploits this staggered introduction of the same regulation to identify capital-market effects. We also examine cross-sectional variation in the strictness of implementation and enforcement as well as in prior regulatory conditions. We find that, on average, market liquidity increases as EU countries tighten market abuse and transparency regulation. The effects are larger in countries that implement and enforce the directives more strictly. They are also stronger in countries with traditionally stricter securities regulation and with a better prior track record of implementing regulation and government policies. The results indicate that the same forces that limited the effectiveness of regulation in the past are still at play when new rules are introduced, leading to hysteresis in regulatory outcomes. The findings further illustrate that harmonizing regulation in countries with different prior conditions can make countries diverge more, rather than move them closer together. This insight has important implications for global regulatory reform.
Number of Pages in PDF File: 74
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: April 15, 2014
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