NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Hans B. Christensen, Luzi Hail, Christian Leuz

NBER Working Paper No. 16737
Issued in January 2011
NBER Program(s):   AP   CF   LE   POL

This paper examines the capital-market 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 directives, but for plausibly exogenous reasons did so at different times. We exploit this staggered introduction to estimate causal effects of tighter securities regulation for the population of European firms, and find significant increases in market liquidity. Examining cross-sectional variation, we find larger treatment effects in countries that implement and enforce the directives more strictly. They are also stronger in countries with traditionally stricter securities regulation and a better track record of implementing regulation. The cross-sectional results indicate that the same forces that limited the effectiveness of regulation in the past are at play when new rules are introduced, leading to hysteresis in regulatory outcomes. The findings suggest that harmonizing regulation in countries with different prior conditions can make countries diverge more rather than less.

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This paper was revised on August 13, 2015

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Document Object Identifier (DOI): 10.3386/w16737

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