When No Law is Better than a Good Law
Bhattacharya, Utpal; Daouk, Hazem
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.
WP 2009-24 June 2009JEL Classification Codes: G15; G18; K22; K42
Charles H. Dyson School of Applied Economics and Management, Cornell University
insider trading; cost of capital; emerging markets; securities law; enforcement