Strong Financial Laws Without Strong Enforcement: Is Good Law Always Better than No Law?

Abstract:     
This paper examines whether strong laws are effective when regulatory institutions are weak. This has become especially relevant due to criticisms of financial market regulation in the US. I test the impact of imposing strong laws on a weak regulatory environment by using China’s principled reforms to market manipulation law as a natural experiment. The results from difference in difference tests suggest that China’s principled law reforms did not improve the market’s information environment, as proxied by the level of informed trade and information asymmetry. This implies that principled law reform is ineffective if the regulatory environment is weak.

Number of Pages in PDF File: 54

Keywords: Regulation, Law Reform, Securities Law, Adverse Selection, Informed Trade, China, Securities Litigation

JEL Classification: G14, G18, H11, K22, K42

working papers series