When No Law is Better than a Good Law

64 Pages Posted: 19 Mar 2005 Last revised: 12 May 2014

Utpal Bhattacharya

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management

Hazem Daouk

Cornell University - School of Applied Economics and Management

Multiple version iconThere are 3 versions of this paper

Date Written: April 27, 2009

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.

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

JEL Classification: G15, G18, K22, K42

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: https://ssrn.com/abstract=558021 or http://dx.doi.org/10.2139/ssrn.558021

Utpal Bhattacharya (Contact Author)

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management ( email )

Clear Water Bay
Kowloon
Hong Kong

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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