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

Posted: 4 Aug 2006

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

Cornell University

Abstract

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

Daouk, Hazem and Lee, Charles M.C. and Ng, David T., Capital Market Governance: How Do Security Laws Affect Market Performance?. Available at SSRN: https://ssrn.com/abstract=921491

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

Cornell University ( email )

Ithaca, NY 14853
United States

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