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We provide a lower-bound estimate of the undetected share of corporate fraud. To identify the hidden part of the “iceberg,” we exploit Arthur Andersen’s demise, which triggered added scrutiny on Arthur Andersen’s former clients and thereby increased the detection likelihood of preexisting frauds. Our evidence suggests that in normal times only one-third of corporate frauds are detected. We estimate that on average 10% of large publicly traded firms are committing securities fraud every year, with a 95% confidence interval of 7%-14%. Combining fraud pervasiveness with existing estimates of the costs of detected and undetected fraud, we estimate that corporate fraud destroys 1.6% of equity value each year, equal to $830 billion in 2021.

We analyze a sample of 330 firms making unaudited disclosures required by Section 302 and 383 firms making audited disclosures required by Section 404 of the Sarbanes-Oxley Act. We find that Section 302 disclosures are associated with negative announcement abnormal returns of-1.8 percent, and that firms experience an abnormal increase in equity cost of capital of 68 basis points. We conclude that Section 302 disclosures are informative and point to lower credibility of disclosing firms' financial reporting. In contrast, we find that Section 404 disclosures have no noticeable impact on stock prices or firms' cost of capital. Further, we find that auditor quality attenuates the negative response to Section 302 disclosures and that accelerated filers-larger firms required to file under Section 404-have significantly less negative returns (-1.10 percent) than non-accelerated filers (-4.22 percent). The findings have implications for the debate about whether to implement a scaled securities regulation system for smaller public companies: material weakness disclosures are more informative for smaller firms that likely have higher pre-disclosure information uncertainty.

Using aggregate data from national accounts, we study whether strengthening and harmonizing securities regulation across the European Union increases household equity ownership. We find a significant increase in the proportion of liquid assets invested in equity, both when a household’s own country adopts the regulation and when other countries adopt the regulation. To directly explore the mechanism through which households’ willingness to directly invest in the equity market increases, we show that the effect of securities regulation is stronger in countries where trust is low and between countries where cultural biases are most pronounced.

The 2002 enactment of Section 403(a) of the Sarbanes-Oxley Act (SOX403) made option backdating less viable for firms. I examine whether the loss of the benefits obtained from option backdating is associated with more fraud after the enactment of SOX403. For firms suspected of backdating options (suspect firms), I find an increase in fraudulent financial reporting after the enactment of SOX403. The increase in fraud is more prominent for suspect firms more affected by SOX403. I also find an increase in insider trading profits from fraud for individuals who formerly benefited from option backdating. My study highlights an unintended consequence of SOX403. The opportunistic timing of executive option compensation appears to be replaced with fraudulent activities that are likely more value-destroying.

Financial institutions must play their part in the fight against climate change. In this context, the concept of the Anthropocene becomes relevant for securities markets via terms such as sustainable finance and ESG. These terms are now a core issue for securities regulators around the world. Lack of clarity and standardized disclosure both across and within jurisdictions make the analysis of and comparison between financial products extremely difficult. Investors’ demand for green products exacerbates the need for standardization. Against this backdrop, financial institutions face two hurdles. First, how to properly assess their in-house financing activities. Second, how to guide investors in their investment decisions. The article shows that, due to the increasing complexity and political importance of green finance, we are witnessing a double, simultaneous shift. First, from transnational private regulation to domestic regulatory law, with the EU in the driver’s seat. Second, towards transnational supervisory standards, adopted by IOSCO. Anthropocene, sustainable finance, ESG, IOSCO, transnational securities regulation, Brussels effect, European green deal, green taxonomy, ESMA, EBA

Proponents of “cooperative federalism” claim that intergovernmental behaviour is endogenous to legal rules about legislative competences: a concurrency rule systematically induces intergovernmental cooperation, where an exclusivity rule systematically impedes it. Citing the imperative for greater cooperation, courts in classical, or dualist, federal systems have used legal doctrine to fashion zones of de facto legislative concurrency. We develop a formal model to explore the soundness of this reasoning. Our analysis complicates courts’ simplistic expectation. Under our assumptions, cooperation may be supported in equilibrium, but only under quite restrictive conditions. We show how the impact (if any) of a de facto concurrency rule on government behaviour depends on the paramountcy rule, government policy preferences relative to the status quo, policy development costs, and the risk of costly political backlash. We pair our theoretical analysis with a study of Canadian federalism jurisprudence and its impact on Canadian securities regulation.

Venture capital (VC) funds have been facing increasing regulatory scrutiny since the 2007 financial crisis, particularly with respect to calls for increased disclosure requirements. In this paper, we examine the effect of more stringent securities regulation on the supply and performance of VC, as well as on new business creation (i.e., entrepreneurial spawning). Using country-level and investment-level data from 34 countries over the years 2000—2008, we find that more stringent securities regulation is positively associated with the supply and performance of VC around the world. More stringent securities regulation is also positively associated with entrepreneurial spawning induced by VC. Among different forms of securities regulation, disclosure stands out as having the most economically meaningful impact, which casts doubt on the oftrepeated objections to disclosure in VC — that it would stifle the VC industry, because secrets would have to be revealed to competitors and the public. These findings are robust to numerous robustness checks for endogeneity. The policy implications are clear, however, regardless of endogeneity concerns: VC and entrepreneurship markets are enabled, not curtailed, in countries with better disclosure standards, when one compares the existing differences in disclosure around the world and changes thereto over the 2000—2008 period.

In February 2003, the U.S. Securities and Exchange Commission officially certified a fourth credit rating agency, Dominion Bond Rating Service (DBRS), for use in bond investment regulations. After DBRS certification, bond yields change in the direction implied by the firm's DBRS rating relative to its ratings from other certified rating agencies. A one-notch-higher DBRS rating corresponds to a 39-basis-point reduction in a firm's debt cost of capital. The impact on yields is driven by cases where the DBRS rating is better than other ratings and is larger among bonds rated near the investment-grade cutoff. These findings indicate that ratings-based regulations on bond investment affect a firm's cost of debt capital.

We examine the capital-market effects of changes in securities regulation in the European Union aimed at reducing market abuse and increasing transparency. To estimate causal effects for the population of E.U. firms, we exploit that for plausibly exogenous reasons, such as national legislative procedures, E.U. countries adopted these directives at different times. We find significant increases in market liquidity, but the effects are stronger in countries with stricter implementation and traditionally more stringent securities regulation. The findings suggest that countries with initially weaker regulation do not catch up with stronger countries, and that countries diverge more upon harmonizing regulation.

We test the impact of stock split rule changes on liquidity behavior in Bursa Malaysia during 2004-2020. Using event study methodology, this study examines stock liquidity on and around stock split days through three subperiods of study, including the first (2004-2006), second (2007-2009), and third (2010-2020) period. We find that liquidity improvement is short-lived in the first and second periods, while it is a long-lived phenomenon in the third period. Firms in the first and second period experienced liquidity improvement only on the split announcement day, while it lasts up to a year after the Ex-date for firms in the third period. Our findings also show a liquidity improvement after the Ex-date only in the third period for the groups of firms categorized based on the liquidity, split factor, and other simultaneous announcements. The findings suggest a positive effect of stock split rule changes implemented by the Securities Commission.