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On the Effects of Capital Markets’ Regulation on Price Informativeness: an Assessment of EU Market Abuse Directive

Paulo Pereira Silva () and Isabel Vieira ()
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Paulo Pereira Silva: CEFAGE, Universidade de Évora

Financial Markets and Portfolio Management, 2022, vol. 36, issue 2, No 1, 125-157

Abstract: Abstract This study assesses the impact on price informativeness of the market abuse directive adopted by European economic area member-states. Price informativeness is measured by the future earnings response coefficient that captures the ability of stock prices to reflect firms’ fundamentals and future profitability. A difference-in-differences analysis is performed to compare the evolution of this coefficient in countries that adopted the directive with that of countries from a control group. The preliminary findings suggest a decline in information content of stock prices about firms’ future profitability in the aftermath of the directive’s entry-into-force. Further exploration suggests however that the detrimental impact is concentrated on countries that neither improved the quality of enforcement regimes nor reinforced the supervisory powers and resources available to national financial authorities following the Directive’s adoption. The pre-existing state of the legal framework has also influenced the obtained results. The impact was particularly detrimental in countries with weaker legal institutions that did not undertake a shift in enforcement with respect to the new law, suggesting that the negative influence of inefficient bureaucracy and weak legal institutions on price informativeness was exacerbated by the adoption of the new rules.

Keywords: Capital market regulation; Price informativeness; Law and finance; European Union (search for similar items in EconPapers)
JEL-codes: F30 G15 G18 G30 G31 K22 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11408-021-00392-6

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