Although many studies show that the presence of institutional investors facilitates the incorporation of accounting information into financial markets, the evidence of informed trading by institutions is rather limited in the extant literature. We address these inconsistent findings by proposing PC _ NII , percentage changes in the number of a stock's institutional investors, as a novel informed trading measure. PC _ NII is better able to detect informed trading than are changes in institutional ownership ( Δ IO )—the measure commonly used in previous studies—because (i) entries and exits are usually triggered by substantive private information and (ii) only a small fraction of institutions have superior information. As conjectured, PC _ NII subsumes the information content of Δ IO and other institutional trading and herding measures in the forecast of stock returns, and its strong predictive power for stock returns reflects mainly its close correlation with future earnings surprises. We also show that PC _ NII helps address empirical issues that require a reliable measure of institutional informed trading.

The economic impact of corporate self-dealing and the regulation against such activity both vary across countries. In this work, we examine the influence of trust on shareholder protection. We hypothesize that anonymous trust can affect self-dealing through two channels. First, trust may complement existing formal regulation. Alternatively, trust and formal regulation can act as substitutes. To test these hypotheses, we examine the association between a country's anti-self-dealing index and anonymous trust. We find that anonymous trust inversely relates to formal self-dealing regulation. We further find that anonymous trust positively relates to financial market development. Collectively, this evidence suggests that trust substitutes for formal self-dealing regulation, providing an alternative mechanism for shareholder protection

We examine the impact of foreign bank presence on a host countries’ business regulatory environment. We employ a panel dataset of 87 developing economies for the 1995–2013 period and measure the efficiency of business regulations using the indices from the Heritage and the Fraser datasets. Our results show that foreign bank presence exerts a positive impact on the efficiency of business regulations; however, we find no evidence in favor of a more pronounced positive effect when foreign banks originate from countries that have a more efficient business regulatory environment. Moreover, host countries’ administrative requirements and, particularly, bureaucracy costs benefit from a foreign bank presence; however, cost and time procedures to start a business do not

We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress

This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm‐specific and market‐wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market‐wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. Moreover, evidence on causal effects of disclosure and reporting regulation is still relatively rare. We also lack evidence on the real effects of such regulation. These limitations provide many research opportunities. We conclude with several specific suggestions for future research

A long regulative process exists between the initial announcement and execution of seasoned equity offerings (SEOs) in China. Although the initial announcement of an SEO is associated with a significant reduction in the stock price, the regulator (China Securities Regulatory Commission) finally approves it after a significant run up in the price of the stock. Chinese managers execute SEOs after additional stock price increases. As a result, the stock price at issuance is not significantly different from the price on announcement, and is significantly higher than the price three months before the announcement. We also find stock prices decline following the execution. These results suggest that regulative screenings for market stabilization are beneficial for SEO market timing, and that Chinese managers successfully time the market, even with a prolonged regulative process

I develop a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on banks’ financial decisions and the implications for the real sector. I model an occasionally binding capital requirement constraint and analyze its costs and benefits. This friction means that the banks refrain from valuable lending. At the same time, capital requirements provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations and raise welfare. I also show that switching to a countercyclical capital requirement regime can help reduce volatility and raise welfare. Finally, by means of the welfare analysis, I also obtain the optimal level of capital requirement

We use a quasi‐experimental research design to examine the effect of model‐based capital regulation on the procyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model‐based regulation increased by 0.5 percentage points. As a consequence, banks reduced the amount of these loans by 2.1 to 3.9 percentage points more than for loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that microprudential capital regulation can have sizeable real effects

the regulator is able to reduce the regulated revenue requirement due to the cost savings resulting from economies of scope, then some of the benefits of joint production ultimately may be passed on to the consumers of the regulated products in the form of lower prices. Diversification into unregulated markets also increases the firm's incentives to engage in process innovation by providing opportunities for earning profits in unregulated markets. Investments in process innovation can lead to lower future costs of producing the regulated product and potential future price reductions to regulated customers. I present a model of the firm's decision to diversify into an unregulated market and look at the implications of that decision for a firm's incentive to innovate and for consumer welfare. The firm's choice is strongly influenced by the extent to which the regulator reduces the amount of fixed cost included in the regulated revenue requirement should the firm choose to diversify. I show that if the regulator is able to observe production costs accurately at the time of a rate review, then diversification increases the firm's incentive to innovate and leads to higher gains in consumers' welfare over time

Money market funds (MMFs), which are crucial to short-term funding markets, rely on voluntary support of fund sponsors to maintain stable share values. I develop a general equilibrium model of MMFs to study how sponsor support affects the industry’s fragility and regulation. Adverse asset-quality shocks lead MMFs to liquidate assets. When liquidity in asset markets is limited, asset prices are lower if more funds liquidate. Lower asset prices, in turn, make sponsor support costlier and even more liquidations occur. This feedback leads to complementarities in sponsors’ support decisions. Based on the model’s insights, I derive implications for the regulation of MMFs