Wednesday, March 9, 2016 | 2:00pm-3:30pm | Room 331, HSBC Business School Building

Abstract

The Securities and Exchange Acts of 1933/1934 are the first nationwide public laws of financial regulation in the world. These laws are implemented with the aims of making information disclosure mandatory and market manipulation illegal. Subsequent financial regulations all over the world follow the principles embedded in these two laws. However, 80 years later, the effects of these laws on financial markets are still under debate and continue to have deep implications on law and financial development at a global scale. Stigler (1964), Benston (1973), Simon (1989) find that the laws are at best ineffective in the aspects of increasing stock returns. Daines and Jones (2005) and Mahoney and Mei (2006) discover minimal evidence proving that the laws improve the market by reducing information asymmetry. Greenstone et al. (2006) find that mandatory disclosure requirements in the 1964 Securities Acts Amendments improve OTC firms’ returns, but their positive effects on exchange listed firms have yet to be directly proven. In this study we examine the impact of the 1934 Act in reducing stock idiosyncratic volatility. Monthly firm-level idiosyncratic volatility series for NYSE/AMEX listed firms in the period of 1926 - 1970 are constructed from daily CRSP stock data; voluntary disclosed accounting data from Moody’s Manual of Investments 1934 are manually collected as a proxy of firms’ disclosure quality before the law. The comparison of the firm-level idiosyncratic volatilities before and after the enactment of the Acts show systematic evidence indicating that the Acts significantly reduce idiosyncratic volatility. Moreover, the firms that disclose much less the key accounting information before the implementation of the Acts, have experienced more reductions in volatility and are thus more deeply affected by the Acts than others. In addition, these firms are associated with further reductions in bid-ask spreads and additional improvements in liquidity after the enactment of the Acts. Our findings suggest that one of the mechanisms, through which the Acts affect the market, have been identified.