What Works in Securities Laws - Essay Example

• The article discusses the regulations of 49 countries to determine how they affect equity issuance. The issue is very relevant as, according to Mahoney, there is a “promoter’s problem” that occurs, when the sellers can’t provide guarantees that the equities they sell are reliable (Mahoney, 1995). Thus, the paper analyses the laws regulating the stock market propositions in each state and researches the connection between these rules and the ways stock markets use to increase profits. “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” (LaPorta et al, 2004). Also, the article provides the results and interpretations made by corresponding theories of security regulation (LaPorta et al, 2004).

• First, the authors represent three assumptions as to the influence the regulation may have on the stock market. The conclusions were strongly supported by hypotheses. The authors define three hypotheses: the first states that market regulation is not needed. This hypothesis is supported by Coase (1960) and Stigle (1964). These experts pay attention to the fact of information disclosure that is provoked by security regulation “Issuers of securities have the incentive to disclose all available information to obtain higher prices simply because failure to disclose would cause investors to assume the worst” (LaPorta et al, 2004). At the same time, the next two hypotheses state that the market needs regulation as the investors should be protected from cheating.

Stock investments usually prescribe high expenses and if the investors are cheated, the losses they bear are too serious. Thus, the government should issue special security laws to regulate the climate in the stock markets. “Both reputations and contract and tort law are insufficient to keep promoters from cheating investors because the payoff from cheating is too high and because private tort and contract litigation is too expensive and unpredictable to serve as a deterrent. To reduce enforcement costs and opportunistic behavior, the government can introduce a securities law that specifies the contracting framework. The two alternative hypotheses differ in what kind of government intervention would be optimal within such a framework” (LaPorta et al, 2004).

• Therefore, the most important conclusion made by the authors of the article is that stock markets really can’t do without regulation as it makes much for their prosperity. Secondly, the results show that security regulation means much as it helps conclude contracts instead of preventing people from concluding them. Precisely, it was revealed that many aspects of public administration do not play an important role. On the contrary, the regulation usually helps investors recuperate the expenses predominantly in large markets.

• Thus, the conclusion was made that the larger the market is, the more thorough monitoring it demands (Barth, Caprio, and Levine, 2003). The authors also emphasize the importance of monitoring the disagreements that occur between stockholders and investors. It is essential for market development. Special attention should be paid also to the change in regulation that would promote economic development and eliminate the gap between the states with different investment abilities (LaPorta et al, 2004).

The authors distinguished between private and public enforcement and concluded that private enforcement is not sufficient as it can’t provide guarantees for investors, thus public enforcement provided by the government should always be present. “In the context of securities markets, a public enforcer can be a securities commission, a central bank, or some other supervisory body” (LaPorta et al, 2004). The authors concluded that the stock market development is highly dependent on the state and its laws. Market discipline is very important for every country and those states, which managed to establish appropriate market discipline, will have a good climate in the stock market. The main task of the law is to resolve conflicts and maintain a positive atmosphere in the stock markets (LaPorta et al, 2004). Read More