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Are bad times good news for the Securities and Exchange Commission?
KTH, School of Industrial Engineering and Management (ITM), Centres, Centre of Excellence for Science and Innovation Studies, CESIS. Leibniz Universität Hannover, Germany; Ministry of Finance, Sweden.ORCID iD: 0000-0002-4381-5280
2015 (English)In: European Journal of Law and Economics, ISSN 0929-1261, E-ISSN 1572-9990, Vol. 40, no 1, 33-47 p.Article in journal (Refereed) Published
Abstract [en]

There exists a considerable debate in the literature investigating how stock market upswings or downswings impact financial market regulation. The present paper contributes to this literature and investigates whether financial market regulation follows a regulative cycle: does regulation, and consequently investor protection, increase as a result of a stock market downturn [as argued by, e.g., Zingales (J Account Res 47(2): 391-425, 2009)] or-contrary to the regulative cycle hypothesis-as a result of an upswing [as claimed by Povel et al. (Rev Financ Stud 20(4): 1219-1254, 2007), or Hertzberg 2003] Following Jackson and Roe (J Financ Econ 93(2): 207-238, 2009), we use funding data on the world's most important financial market regulator, the U.S. Securities and Exchange Commission (SEC), as a proxy for the politically desired degree of regulation. We apply time series analysis. Using more than 60 years of data, we show that the SEC's funding follows a regulative cycle: A weak stock market results in increased resources for the SEC. A strong stock market results in reduced resources. Our findings underline the downside of regulation as the regulative cycle amplifies the technical procyclicality inherent in regulation.

Place, publisher, year, edition, pages
2015. Vol. 40, no 1, 33-47 p.
Keyword [en]
Financial regulation, Procyclicality, Securities and Exchange Commission, Stock market
National Category
Economics and Business Law
URN: urn:nbn:se:kth:diva-172153DOI: 10.1007/s10657-014-9455-yISI: 000358141900003ScopusID: 2-s2.0-84937515947OAI: diva2:847284

QC 20150819

Available from: 2015-08-19 Created: 2015-08-14 Last updated: 2015-08-19Bibliographically approved

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