Are bad times good news for the Securities and Exchange Commission?

Tim Lohse and Christian Thomann

European Journal of Law and Economics, 2015, vol. 40, issue 1, 33-47

Abstract: 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. Copyright Springer Science+Business Media New York 2015

Keywords: Financial regulation; Procyclicality; Securities and Exchange Commission; Stock market; G28; G18; C32 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Working Paper: Are Bad Times Good News for the Securities and Exchange Commission? (2014)
Working Paper: Are Bad Times Good News for the Securities and Exchange Commission? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:ejlwec:v:40:y:2015:i:1:p:33-47

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DOI: 10.1007/s10657-014-9455-y

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