Capital Market Governance: How Do Security Laws Affect Market Performance?
Cornell University - School of Applied Economics and Management
Charles M.C. Lee
Stanford University - Graduate School of Business
David T. Ng
February 16, 2006
This paper examines the link between capital market governance (CMG) and several key measures of market performance. Using detailed data from individual stock exchanges, we develop a composite CMG index that captures three dimensions of security laws: the degree of earnings opacity, the enforcement of insider laws, and the effect of removing short-selling restrictions. We find that improvements in the CMG index are associated with decreases in the cost-of-equity capital (both implied and realized), increases in market liquidity (trading volume and market depth), and increases in market pricing efficiency (reduced price synchronicity and IPO underpricing). The results are quite consistent across individual components of CMG and over alternative market performance measures.
Number of Pages in PDF File: 53
Keywords: capital market governance, insider trading, earnings opacity, market performance
JEL Classification: G15, G30
Date posted: April 21, 2005