The Merits of One-Size-Fits-All Securities Regulation

• In Event: Disclosure Regulation

Abstract

We develop and analyze a model where two firms that interact in the product market also raise funds in a securities market. The strength of securities regulation is set by a utility-maximizing regulator, who can be influenced by the firms' lobbying activities. We examine and compare two regulatory regimes. In the first, both firms are subject to the same regulation (one-size-fits-all, or OS), and in the second, each firm is subject to its own securities regulation (individual regulation, or IR). We find that there is less lobbying in the OS regime than in the IR regime, and that this makes the OS regime more welfare efficient than the IR regime. We also develop empirical implications related to agency problems between investors and managers and product and capital market interactions between firms, showing how changes in these affect regulatory strength, firms' lobbying, and costs of capital in both OS and IR regimes.

Authors

• Henry Friedman, University of California, Los Angeles

• Mirko Stanislav Heinle, University of Pennsylvania