Measuring the Impact of Regulation on Market Stability: Evidence from the US Markets

In this paper, we introduce a new methodology designed to test the effect of new regulatory disclosure requirements on the disclosure threshold as predicted by the extant literature (Verrecchia (1983), Dye (1985)). We apply our methodology to test the consistency between observed effects from major US regulation past and present (1933/1934 Securities Acts, Regulation Fair Disclosure 2000, and the Sarbanes-Oxley Act 2002) with regulatory objectives. We find unambiguous support for the consistency between theoretical predictions and regulatory objectives in relation to the 1933/1934 Acts. For the current regulation we find mixed support because of observed differences between NYSE and NASDAQ/AMEX. We explore two possible explanations for this result, a small versus large firm effect versus an effect induced from the different observed strength of the three major exchanges/markets in terms of embracing the disclosure aspects of the new regulation. Our evidence provides stronger support for this latter explanation.