Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement

Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement

Hans Christensen, Luzi Hail, Christian Leuz

Series number :

Serial Number: 
407/2014

Date posted :

February 01 2014

Last revised :

February 18 2014
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Keywords

  • Capital market regulation • 
  • enforcement • 
  • Disclosure • 
  • law and finance • 
  • European Union • 
  • liquidity

This paper examines the economic effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation. All EU member states were required to adopt these two directives, but did so at different points in time.

Our research design exploits this staggered introduction of the same regulation to identify capital-market effects. We also examine cross-sectional variation in the strictness of implementation and enforcement as well as in prior regulatory conditions. We find that, on average, market liquidity increases as EU countries tighten market abuse and transparency regulation. The effects are larger in countries that implement and enforce the directives more strictly. They are also stronger in countries with traditionally stricter securities regulation and with a better prior track record of implementing regulation and government policies. The results indicate that the same forces that limited the effectiveness of regulation in the past are still at play when new rules are introduced, leading to hysteresis in regulatory outcomes. The findings further illustrate that harmonizing regulation in countries with different prior conditions can make countries diverge more, rather than move them closer together. This insight has important implications for global regulatory reform.

Authors

Real name: 
Hans Christensen
Real name: 
Research Member
The Wharton School, University of Pennsylvania
Fellow, Research Member
The University of Chicago - Booth School of Business