The Economics of Disclosure and Financial Reporting Regulation

Disclosure and reporting regulation is a central and recurring policy issue that has received significant attention in academic research on accounting, finance, and economics. Further fueling demand for this research are increasingly frequent requests that policy makers and regulators conduct cost-benefit or economic analyses of both existing and planned regulations and standards.

In a recent paper, we review the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. We also extensively review the literature on mandatory International Financial Reporting Standards (IFRS). Our efforts are timely, because three developments have spurred disclosure … Read more

Who Falls Prey to the Wolf of Wall Street?

Seniors [are] particularly vulnerable to investment scams” read one headline. “We are taking further steps to find and eliminate from our system pump-and-dump scammers, those who prey on retirees,” noted Jay Clayton, chairman of the Securities and Exchange Commission. The news media, movies like “The Wolf of Wall Street,” and even regulators have long portrayed the elderly and other vulnerable people as the most frequent victims of these fraudulent schemes. Yet, do we actually know who invests in pump-and-dump scams? It is a critical question, because designing effective investor protection requires understanding who invests and why.… Read more

The Twilight Zone: OTC Regulatory Regimes and Market Quality

More than 8,000 domestic equity securities were publicly traded in the U.S. over-the-counter (OTC) market in 2010.  Yet, research studying this market is limited.  On the one hand, the OTC market attracts stocks of firms that tend to be small and growing.  On the other hand, it generally offers investors less protection than the traditional exchanges do, and fraudulent and abusive practices in this market can cause significant economic harm to investors.  Thus, the OTC market illustrates the trade-off that securities regulators face between ensuring investor protection and creating a viable market for small growth firms.  This trade-off has come … Read more

No Country Left Behind: History Complicates Efforts to Harmonize Global Regulation

The European Union (EU) enacted a series of regulations in the early 2000s to improve the financial markets of member states. While the new regulations were formally the same across the EU, member countries must individually implement, supervise, and enforce them. Our paper, recently published in the Review of Financial Studies and available here, uses this situation to estimate the causal effect of securities regulation on market liquidity and also to examine how prior conditions, implementation, and enforcement affect the results of new regulation.

In our study, we examined the liquidity effects of two EU directives on securities regulation. … Read more