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.