Public Enforcement of Securities Laws: Preliminary Evidence

I recently presented my new discussion paper with Mark Roe, Public Enforcement of Securities Laws: Preliminary Evidence, at the Conference on Empirical Legal Studies at the New York University School of Law. The paper develops a measure of securities-enforcement intensity and examines financial outcomes worldwide in light of enforcement activity. The abstract of the paper follows:

The legal consequence of economic actors ignoring their legal obligations, such as laws that protect outside investors in firms, is a recurring issue. Recent scholarship examines the relative importance of private enforcement for investor protection on the one hand–via disclosure and lawsuits among contracting parties–and public enforcement on the other–via financial, regulatory, and even criminal rules and penalties. Recent financial work has seen the former to be more important than the latter. Yet much recent legal scholarship has seen private enforcement of securities laws in the United States as poorly designed, with firms–and, hence, wronged shareholders–often bearing the cost of insiders’ errors and disclosure failure. To better understand the relative importance of public and private enforcement, we here develop an enforcement variable based on securities regulators’ staffing levels and budgets. We then examine financial outcomes around the world–such as stock market capitalization, trading volume, number of domestic firms, and number of IPOs–in light of these measures of public enforcement and find that more intense public enforcement regularly correlates with strong financial outcomes. In horse races between our measures of public enforcement and the measures of private enforcement prominent in recent financial scholarship, public enforcement is typically at least as important as private enforcement in explaining important financial market outcomes around the world.

The full paper is available for download here.