KTH/CESIS Working Paper Series in Economics and Institutions of Innovation
Are Bad Times Good News for the Securities and Exchange Commission?
() 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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