When No Law is Better than a Good Law

Utpal Bhattacharya () and Hazem Daouk

No 2004-10, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: This paper argues, both theoretically and empirically, that sometimes no security law may be better than a good security law that is not enforced. The first part of the paper formalizes the sufficient conditions under which this happens for any law. The second part of the paper shows that a specific security law - the law prohibiting insider trading - may satisfy these conditions, which implies that our theory predicts that it is sometimes better not to have an insider trading law than to have an insider trading law but not enforce it. The third part of the paper takes this prediction to the data. We revisit the panel data set assembled by Bhattacharya and Daouk (2002), who showed that enforcement, not the mere existence, of insider trading laws reduced the cost of equity in a country. We find that the cost of equity actually rises when a country introduces an insider trading law, but does not enforce it.

JEL-codes: G15 G18 K22 K42 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2004-06
Note: First version: June 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: When No Law is Better Than a Good Law (2009)
Working Paper: When No Law is Better than a Good Law (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2004-10

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