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CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology KTH/CESIS Working Paper Series in Economics and Institutions of Innovation

No 371:
Are Bad Times Good News for the Securities and Exchange Commission?

Tim Lohse () and Christian Thomann ()

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 (2009)) or – contrary to the regulative cycle hypothesis – as a result of an upswing (as claimed by Povel (2007), or Hertzberg (2003)) Following Jackson and Roe (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.

Keywords: Financial Regulation; Procyclicality; Securities and Ex-change Commission; Stock Market; (follow links to similar papers)

JEL-Codes: C32; G18; G28; (follow links to similar papers)

16 pages, July 24, 2014

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