When No Law is Better than a Good Law
AbstractThis paper argues, both theoretically and empirically, that sometimes no security law may be better than a good security law that is not enforced. The first part of the paper formalizes the sufficient conditions under which this happens for any law. The second part of the paper shows that a specific security law - the law prohibiting insider trading - may satisfy these conditions, which implies that our theory predicts that it is sometimes better not to have an insider trading law than to have an insider trading law but not enforce it. The third part of the paper takes this prediction to the data. We revisit the panel data set assembled by Bhattacharya and Daouk (2002), who showed that enforcement, not the mere existence, of insider trading laws reduced the cost of equity in a country. We find that the cost of equity actually rises when a country introduces an insider trading law, but does not enforce it.
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Bibliographic InfoPaper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2004-10.
Length: 25,  p.
Date of creation: Jun 2004
Date of revision:
Note: First version: June 2004
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Other versions of this item:
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
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