The Influence of Cross-Border Cooperation on Market Quality

• In Event: Stock Markets I

Abstract

This paper examines how cooperation between national securities regulators affects equity market liquidity, using the International Organization of Securities Commissions’ (IOSCO) Multilateral Memorandum of Understanding (MMoU) as a shock to cooperation. The MMoU intends to protect investors by filling cross-border regulatory gaps that historically exposed investors to information asymmetry, agency costs, and expropriation risks. I find that when a regulator enters the network and creates linkages with other regulators, the affected shares experience large improvements in liquidity—indicated by narrower bid-ask-spreads. The effects are stronger when (a) host countries rank high in legal strength, (b) home and host markets have compatible legal origins, and (c) blocking statutes are present in home countries. The pattern of liquidity enhancements is also consistent with economies of scale and reciprocity (when countries have a greater stake in each other’s capital markets). Larger liquidity improvements occur in firms with poor governance and dispersed ownership.

Author

• Roger Silvers, University of Utah