Abstract

http://ssrn.com/abstract=558021
 
 

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When No Law is Better than a Good Law


Utpal Bhattacharya


Indiana University - Kelley School of Business - Department of Finance

Hazem Daouk


Cornell University - School of Applied Economics and Management

April 27, 2009

AFA 2008 New Orleans Meetings Paper

Abstract:     
This paper argues, both theoretically and empirically, that sometimes no securities law may be better than a good securities law that is not enforced. The first part of the paper formalizes the sufficient conditions under which this happens for any law. The second part of the paper shows that a specific securities law – the law prohibiting insider trading – may satisfy these conditions, which implies that our theory predicts that it is sometimes better not to have an insider trading law than to have an insider trading law but not enforce it. The third part of the paper takes this prediction to the data. We revisit the panel data set assembled by Bhattacharya and Daouk (2002), who showed that enforcement, not the mere existence, of insider trading laws reduced the cost of equity in a country. We find that the cost of equity actually rises when some countries enact an insider trading law, but do not enforce it.

Number of Pages in PDF File: 64

Keywords: insider trading, cost of capital, emerging markets, securities law, enforcement

JEL Classification: G15, G18, K22, K42

working papers series


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Date posted: March 19, 2005 ; Last revised: May 12, 2014

Suggested Citation

Bhattacharya , Utpal and Daouk, Hazem, When No Law is Better than a Good Law (April 27, 2009). AFA 2008 New Orleans Meetings Paper. Available at SSRN: http://ssrn.com/abstract=558021 or http://dx.doi.org/10.2139/ssrn.558021

Contact Information

Utpal Bhattacharya (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3413 (Phone)
812-855-5875 (Fax)
HOME PAGE: http://www.kelley.iu.edu/ubhattac/

Hazem Daouk
Cornell University - School of Applied Economics and Management ( email )
446 Warren Hall
Ithaca, NY 14853
United States
331-45-78-63-88 (Fax)
HOME PAGE: http://courses.cit.cornell.edu/hd35/
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