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Capital market governance: How do security laws affect market performance?

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  • Daouk, Hazem
  • Lee, Charles M.C.
  • Ng, David

Abstract

This paper examines the link between capital market governance (CMG) and several key measures of market performance. Using detailed data from individual stock exchanges, we develop a composite CMG index that captures three dimensions of security laws: the degree of earnings opacity, the enforcement of insider laws, and the effect of removing short-selling restrictions. We find that improvements in the CMG index are associated with decreases in the cost-of-equity capital (both implied and realized), increases in market liquidity (trading volume, market depth, and U.S. foreign investments), and increases in market pricing efficiency (reduced price synchronicity and IPO underpricing). The results are quite consistent across individual components of CMG and over alternative market performance measures.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 12 (2006)
Issue (Month): 3 (June)
Pages: 560-593

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Handle: RePEc:eee:corfin:v:12:y:2006:i:3:p:560-593

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Web page: http://www.elsevier.com/locate/jcorpfin

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Citations

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Cited by:
  1. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2013. "Exchange trading rules, surveillance and insider trading," CFS Working Paper Series 2013/15, Center for Financial Studies (CFS).
  2. Cumming, D. & Johan, S.A., 2008. "Global market surveillance," Discussion Paper 2008-002, Tilburg University, Tilburg Law and Economic Center.
  3. Rui Albuquerue & Neng Wang, 2008. "Agency Conflicts, Investment, and Asset Pricing," Journal of Finance, American Finance Association, vol. 63(1), pages 1-40, 02.
  4. Ana Carvajal & Jennifer A. Elliott, 2009. "The Challenge of Enforcement in Securities Markets," IMF Working Papers 09/168, International Monetary Fund.
  5. Klein, Christian & Stellner, Christoph, 2014. "Does sovereign risk matter? New evidence from eurozone corporate bond ratings and zero-volatility spreads," Review of Financial Economics, Elsevier, vol. 23(2), pages 64-74.
  6. Cumming, Douglas & Johan, Sofia & Li, Dan, 2011. "Exchange trading rules and stock market liquidity," Journal of Financial Economics, Elsevier, vol. 99(3), pages 651-671, March.
  7. Axel Dreher & Christian Hopp, 2007. "Do Differences in Institutional and Legal Environments Explain Cross-Country Variations in IPO Underpricing?," CESifo Working Paper Series 2082, CESifo Group Munich.
  8. Engelen, Peter-Jan & van Essen, Marc, 2010. "Underpricing of IPOs: Firm-, issue- and country-specific characteristics," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1958-1969, August.
  9. Ameer, Rashid, 2010. "The role of institutional investors in the inventory and cash management practices of firms in Asia," Journal of Multinational Financial Management, Elsevier, vol. 20(2-3), pages 126-143, July.
  10. Chen, Gongmeng & Firth, Michael & Gao, Daniel N. & Rui, Oliver M., 2006. "Ownership structure, corporate governance, and fraud: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 424-448, June.
  11. He, Wen & Li, Donghui & Shen, Jianfeng & Zhang, Bohui, 2013. "Large foreign ownership and stock price informativeness around the world," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 211-230.
  12. Jayaraman, Sudarshan, 2012. "The effect of enforcement on timely loss recognition: Evidence from insider trading laws," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 77-97.
  13. Chen, Kevin C.W. & Chen, Zhihong & Wei, K.C. John, 2009. "Legal protection of investors, corporate governance, and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 273-289, June.
  14. Hooy, Chee-Wooi & Lim, Kian-Ping, 2013. "Is market integration associated with informational efficiency of stock markets?," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 29-44.

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