What Works in Securities Laws - THE JOURNAL OF FINANCE •...

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Unformatted text preview: THE JOURNAL OF FINANCE • VOL. LXI, NO. 1 • FEBRUARY 2006 What Works in Securities Laws? RAFAEL LA PORTA, FLORENCIO LOPEZ-DE-SILANES, and ANDREI SHLEIFER ∗ ABSTRACT We examine the effect of securities laws on stock market development in 49 countries. We find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets. I N THIS PAPER , WE EXAMINE SECURITIES LAWS OF 49 COUNTRIES , focusing specifically on how these laws regulate the issuance of new equity to the public. Security issuance is subject to the well-known “promoter’s problem” (Mahoney (1995))— the risk that corporate issuers sell bad securities to the public—and as such is covered in all securities laws. 1 We analyze the specific provisions in securities laws governing initial public offerings in each country, examine the relationship between these provisions and various measures of stock market development, and interpret the evidence in light of the available theories of securities laws. For securities markets, alternative theories of optimal legal arrangements can be distilled down to three broad hypotheses. Under the null hypothesis, associated with Coase (1960) and Stigler (1964), the optimal government pol- icy is to leave securities markets unregulated. Issuers of securities have an incentive to disclose all available information to obtain higher prices simply be- cause failure to disclose would cause investors to assume the worst (Grossman (1981), Grossman and Hart (1980), Milgrom and Roberts (1986)). Investors can ∗ La Porta is at Tuck School of Business, Dartmouth College; Lopez-de-Silones is at the Univer- sity of Amsterdam; and Shleifer is at Harvard University. We are grateful to the Inter-American Development Bank, the Gildor Foundation, the BSI Gamma Foundation, the NSF, the Interna- tional Institute for Corporate Governance at Yale University, and the Doing Business project of the World Bank for financial support; to Alfredo Larrea-Falcony and Qian Sun for significant contri- butions to this work; to Constanza Blanco, John C. Coates IV, Luis Leyva Martinez, Carlos Orta Tejeda, Tuffic Miguel Ortega, Jorge Gabriel Taboada Hoyos, Annette L. Nazareth, and Robert Strahota for assistance in developing the questionnaire; to Douglas Baird, Jack Coffee, Frank Easterbrook, Richard Epstein, Merritt Fox, Edward Glaeser, Simon Johnson, Lawrence Katz, Paul Mahoney, Mark Ramseyer, Kevin Murphy, Eric Posner, Richard Posner, Roberta Romano, Luigi Spaventa, the editor, and two referees of this journal for helpful comments; and to Jeffrey Fried- man, Mario Gamboa-Cavazos, Amy Levin, Anete Pajuste, and Vasudev Vadlamudi for excellent research assistance. The data used in this paper can be downloaded from http://post.economics....
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This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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What Works in Securities Laws - THE JOURNAL OF FINANCE •...

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