Incorporating Market Reactions Into Agency Rulemaking

38 Pages Posted: 12 Aug 2019 Last revised: 26 Jan 2020

Date Written: December 2019


The Article proposes a novel mechanism by which financial regulatory agencies, such as the U.S. Securities and Exchange Commission (“SEC”), can engage in a more empirically informed rulemaking process from an ex ante perspective. Suppose an agency is considering adopting a rule that applies to a wide group of firms, but lacks reliable data to gauge its likely effects. This Article suggests that, to the extent investors’ reactions to unexpected rule-related developments can provide information about the rule’s effects on the firms, the agency should examine the stock market’s reactions to such events that arise during the rulemaking process. In some cases, such events may arise without any act on the part of the agency—for example, as a result of certain unforeseen acts of Congress. In other cases, they may arise from the agency’s carefully planned rule-related announcements or previously unannounced changes in the scope of the rule. The agency’s event study should then constitute the default starting point of discussion for the regulatory dialogues that take place during the comment period, and the ensuing discussion should inform the agency’s decision whether to adopt the rule as well as its final cost-benefit analysis. In advancing this proposal, this Article relies on the recently developed literature in financial economics that analyzes the “feedback effects” of financial markets. This Article concludes by discussing specific issues for the agency to consider in implementing the proposal.

Keywords: stock market, price informativeness, Securities and Exchange Commission, rulemaking, feedback effects, real effects, financial markets, manipulation

JEL Classification: K, K1, K23

Suggested Citation

Lee, Yoon-Ho Alex, Incorporating Market Reactions Into Agency Rulemaking (December 2019). 54 Wake Forest L. Rev. 1361 (2019), Available at SSRN:

Yoon-Ho Alex Lee (Contact Author)

Northwestern Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
(312) 503-2565 (Phone)

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