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Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization

Authors

  • RENÉ M. STULZ

    1. The Ohio State University, NBER, and ECGI. I am grateful for excellent scientific assistance from Rose Liao; for useful conversations with Craig Doidge and Ingrid Werner; and for comments from Ray Ball, John Coates, Oliver Hart, Howell Jackson, Andrew Karolyi, Christian Leuz, Stew Myers, Doug Skinner, Abbie Smith, and participants at the 2008 Journal of Accounting Research Conference, at the 2008 WFA meetings, and at a seminar at Ohio State.
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ABSTRACT

As barriers to international investment fall and technology improves, the cost advantages for a firm's securities to trade publicly in the country in which that firm is located and for that country to have a market for publicly traded securities distinct from the capital markets of other countries will progressively disappear. Securities laws remain an important determinant of whether and where securities are issued, how they are valued, who owns them, and where they trade. I show that there is a demand from entrepreneurs for mechanisms that allow them to commit to credible disclosure because disclosure helps reduce agency costs. Under some circumstances, mandatory disclosure through securities laws can help satisfy that demand, but only provided investors or the state can act on the information disclosed and the laws cannot be weakened ex post too much through lobbying by corporate insiders. With financial globalization, national disclosure laws can have wide-ranging effects on a country's welfare, on firms and on investor portfolios, including the extent to which share holdings reveal a home bias. In equilibrium, if firms can choose the securities laws they are subject to when they go public, some firms will choose stronger securities laws than those of the country in which they are located and some firms will do the opposite.

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