Capital Market Governance: How Do Security Laws Affect Market Performance?

53 Pages Posted: 21 Apr 2005

See all articles by Hazem Daouk

Hazem Daouk

Cornell University - School of Applied Economics and Management

Charles M.C. Lee

Stanford University - Graduate School of Business

David T. Ng

Johnson College of Business

Date Written: February 16, 2006

Abstract

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.

Keywords: capital market governance, insider trading, earnings opacity, market performance

JEL Classification: G15, G30

Suggested Citation

Daouk, Hazem and Lee, Charles M.C. and Ng, David T., Capital Market Governance: How Do Security Laws Affect Market Performance? (February 16, 2006). Available at SSRN: https://ssrn.com/abstract=702682 or http://dx.doi.org/10.2139/ssrn.702682

Hazem Daouk (Contact Author)

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/

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

David T. Ng

Johnson College of Business ( email )

301G Warren Hall, Cornell University
Ithaca, NY 14850-1967
United States
6072550145 (Phone)

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