CAPITAL-MARKET EFFECTS OF SECURITIES REGULATION: THE ROLE OF IMPLEMENTATION AND ENFORCEMENT


This paper examines capital market effects of changes in securities regulation. We analyze two key
capital market directives in the European Union (EU) that tightened market abuse and transparency
regulation and, in particular, their enforcement. All EU member states were required to adopt these
two directives but did so at different points in time. Our research design exploits this differential timing
of the same regulatory change for identification and uses cross-sectional variation in the capital-market
effects to highlight the role of implementation and enforcement for regulatory outcomes. We find that,
on average, market liquidity increases and firms’ cost of capital decreases as EU member states 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 track record of implementing regulation and government policies in general.
Overall, these findings show that the effects of regulation depend crucially on implementation and
enforcement. Moreover, the results indicate that the same forces that have limited the effectiveness
of securities regulation in the past are still at play when new rules are introduced, which has important
implications for the expected outcomes of regulatory reforms as well as efforts to harmonize regulation
across countries.