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When No Law is Better than a Good Law

Author

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  • Bhattacharya, Utpal
  • Daouk, Hazem

Abstract

This paper argues, both theoretically and empirically, that sometimes no securities law may be better than a good securities 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 securities law - the law prohibiting insider trading - may satisfy these conditions. The third part of the paper takes this prediction to the data. We find that the cost of equity actually rises when some countries enact an insider trading law, but do not enforce it.

Suggested Citation

  • Bhattacharya, Utpal & Daouk, Hazem, 2009. "When No Law is Better than a Good Law," Working Papers 51184, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudawp:51184
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    File URL: http://purl.umn.edu/51184
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    References listed on IDEAS

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    1. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-157, March.
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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. Andreas Hackethal & Reinhard H. Schmidt & Marcel Tyrell, 2005. "Banks and German Corporate Governance: on the way to a capital market-based system?," Corporate Governance: An International Review, Wiley Blackwell, vol. 13(3), pages 397-407, May.
    3. Peter-Jan Engelen, 2011. "Legal versus Reputational Penalties in Deterring Corporate Misconduct," Chapters,in: Does Economic Governance Matter?, chapter 4 Edward Elgar Publishing.
    4. Xu, Wenming, 2016. "Reforming private securities litigation in China: The stock market has already cast its vote," International Review of Law and Economics, Elsevier, vol. 45(C), pages 23-32.
    5. Sergey Stepanov, 2010. "Shareholder access to manager-biased courts and the monitoring/litigation trade-off," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 270-300.
    6. repec:eee:jimfin:v:74:y:2017:i:c:p:69-87 is not listed on IDEAS
    7. Stefan Palan & Thomas Stöckl, 2014. "When chasing the offender hurts the victim: Collateral damage from insider legislation," Working Paper Series, Social and Economic Sciences 2014-03, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    8. 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.
    9. Weber, Anke, 2009. "An empirical analysis of the 2000 corporate tax reform in Germany: Effects on ownership and control in listed companies," International Review of Law and Economics, Elsevier, vol. 29(1), pages 57-66, March.
    10. Mathur, Ike & Marcelin, Isaac, 2015. "Institutional failure or market failure?," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 266-280.
    11. Cumming, Douglas & Dannhauser, Robert & Johan, Sofia, 2015. "Financial market misconduct and agency conflicts: A synthesis and future directions," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 150-168.
    12. Autore, Don M. & Boulton, Thomas J. & Smart, Scott B. & Zutter, Chad J., 2014. "The impact of institutional quality on initial public offerings," Journal of Economics and Business, Elsevier, vol. 73(C), pages 65-96.
    13. Tong, Wilson H.S. & Zhang, Shaojun & Zhu, Yanjian, 2013. "Trading on inside information: Evidence from the share-structure reform in China," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1422-1436.
    14. Gider, Jasmin, 2014. "Do SEC Detections Deter Insider Trading? Evidence from Earnings Announcements," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100343, Verein für Socialpolitik / German Economic Association.
    15. Adler Mandelbaum, Sara E, 2014. "Effects of Threshold Uncertainty on Common-Pool Resources," MPRA Paper 59120, University Library of Munich, Germany.
    16. Madura, Jeff & Marciniak, Marek, 2014. "Bidder country characteristics and informed trading in U.S. targets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 256-284.
    17. Timo Korkeamäki & Elina Rainio & Tuomas Takalo, 2013. "Reforming corporate law in an emerging market," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 21(3), pages 509-551, July.
    18. Ferrando, Annalisa & Moro, Andrea & Maresch, Daniela, 2015. "Creditor protection, judicial enforcement and credit access," Working Paper Series 1829, European Central Bank.
    19. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2015. "Exchange trading rules, surveillance and suspected insider trading," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 311-330.
    20. Balasubramanian, N. & Black, Bernard S. & Khanna, Vikramaditya, 2010. "The relation between firm-level corporate governance and market value: A case study of India," Emerging Markets Review, Elsevier, vol. 11(4), pages 319-340, December.
    21. Thiago De Araújo Fauvrelle & Aléssio Tony Cavalcanti De Almeida, 2018. "Determinants Of Judicial Efficiency Change: Evidence From Brazil," Anais do XLIV Encontro Nacional de Economia [Proceedings of the 44th Brazilian Economics Meeting] 79, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    22. repec:eee:finmar:v:35:y:2017:i:c:p:104-129 is not listed on IDEAS
    23. Vahe Lskavyan, 2015. "Insider regulation and the incentive to invest as an insider," Economics of Governance, Springer, vol. 16(3), pages 207-227, August.
    24. 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.

    More about this item

    Keywords

    insider trading; cost of capital; emerging markets; securities law; enforcement; International Development; G15; G18; K22; K42;

    JEL classification:

    • 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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