Capital-Market Effects of Securities Regulation : Prior Conditions, Implementation, and Enforcement Revisited

There are at least three possible times that changes in securities regulations are effective: (1) the date that the securities regulations are put forth (e.g., as in a pan-European Union directive); (2) the date that the new regulations are signed into law; and (3) the date at which new regulations are implemented with organizational agreements and computerized market surveillance, in order to detect the wrongdoing that is the subject of the new regulations. While it is not clear from Christensen, Hail, and Leuz (2016 Review of Financial Studies), the market abuse rules they examine are the same as in Cumming, Johan, and Li (2011 Journal of Financial Economics), with a difference in focus on the date: Christensen et al. (2016) pick date (2), while Cumming et al. (2011)pick date (3). Both papers study and find the exact same effect: regulatory change improves market liquidity. We explain the relative merits of the different approaches in this paper. Also, we explain that Christensen et al. (2016) mischaracterize Cumming et al. (2011) with respect to not examining changes in regulation over time, the use of dummy variables versus exchange trading rule legal indices Cumming et al. created, and difference-in-differences tests to study regulatory changes, among other things