Capital Market Governance: How Do Security Laws Affect Market Performance?
Posted: 4 Aug 2006
This paper explores the link between capital market governance and several key characteristics of equity markets. Using detailed data glean from individual stock exchanges, we develop a composite capital market governance measure (CMG index) that captures three dimensions of market regulation and enforcement: earning opacity, enforcement of insider trading laws, and short-selling restrictions. Our analysis shows that after, controlling for other factors, an increase in a country's CMG index is associated with significant decreases in the cost-of-equity capital, and price synchronicity (Morck et al. (2000)); as well as significant increases in trading volume and US foreign stockholdings. We conclude that changes in these laws can significantly affect market performance.
Keywords: capital market governance, insider trading, earnings opacity, short-selling constraints, market performance
JEL Classification: G15, G30
Suggested Citation: Suggested Citation