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When No Law is Better than a Good Law

Author
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.
Description
WP 2009-24 June 2009 JEL Classification Codes: G15; G18; K22; K42
Date Issued
2009-06-01Publisher
Charles H. Dyson School of Applied Economics and Management, Cornell University
Subject
insider trading; cost of capital; emerging markets; securities law; enforcement
Type
article