Is Less Really Better?
CA Magazine August 2004
Posted: 1 Jul 2013
Date Written: June 1, 2003
The need for financial market regulation is often justified by the potential for market failure arising from the information gap between managers — who possess inside information — and investors (information asymmetry), as well as from misaligned incentives (moral hazard). However, very little attention has been paid to the potential for regulatory failure. After the dot-com bubble, all market agents (directors, auditors, financial analysts, accounting standard setters) can be asked why they failed to prevent the scandals that engulfed companies such as Enron, WorldCom and Tyco. New laws in the US (Sarbanes-Oxley Act) and new Canadian independence rules indicate that the predominant view among legislators is that we need more regulation, more severe penalties, and larger enforcement budgets to protect financial markets from fraud.
However, since financial markets have been regulated for the past 70 years, the same question can be asked of the regulators — why did they fail to protect investors from fraud?
We could be even more impolite and ask whether too much (misguided) regulation is making financial markets more vulnerable to fraud. Regulators could just as likely be the cause of our problems as the solution.
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