Regulating Conflicts of Interest: The Effect of Sanctions and Enforcement

Review of Finance (Forthcoming)

46 Pages Posted: 19 Mar 2011 Last revised: 31 Mar 2013

See all articles by Michel Dubois

Michel Dubois

University of Neuchatel - Institute of Financial Analysis

Laurent Frésard

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute

Pascal Dumontier

University of Grenoble; University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG)

Date Written: February 15, 2013

Abstract

This paper studies how legal sanctions and enforcement affect brokers’ conflicts of interest emanating from investment banking activities. We exploit the recent adoption of the Market Abuse Directive (MAD) across European countries and use the variation in legal sanctions and enforcement that exists in Europe to identify brokers’ reaction. Overall, the enactment of MAD significantly reduced optimistic investment advice. This reduction is larger in countries equipped with more severe legal sanctions and in countries that strongly enforce the rules. Our analysis underscores the importance of legal sanctions and enforcement power to understand the real consequences of regulatory changes.

JEL Classification: G12, G14, G24, G28, K22

Suggested Citation

Dubois, Michel and Frésard, Laurent and Dumontier, Pascal, Regulating Conflicts of Interest: The Effect of Sanctions and Enforcement (February 15, 2013). Review of Finance (Forthcoming), Available at SSRN: https://ssrn.com/abstract=1786523 or http://dx.doi.org/10.2139/ssrn.1786523

Michel Dubois

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel, 7
Neuchatel, 2000
Switzerland
41 32 718 13 66 (Phone)
41 32 718 13 61 (Fax)

Laurent Frésard (Contact Author)

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Pascal Dumontier

University of Grenoble ( email )

Grenoble
France

University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG)

150 rue de la Chimie, BP47
Grenoble Cedex 9, 38040
France

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