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When No Law is Better than a Good Law? Utpal Bhattacharya Hazem Daouk

When No Law is Better than a Good Law? Utpal Bhattacharya Hazem Daouk. Discussant Randall Morck Jarislowsky Professor of Finance, The University of Alberta William Lyon Mackenzie-King Visiting Professor, Harvard University Research Association, National Bureau of Economic Research.

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When No Law is Better than a Good Law? Utpal Bhattacharya Hazem Daouk

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  1. When No Law is Betterthan a Good Law?Utpal BhattacharyaHazem Daouk Discussant Randall Morck Jarislowsky Professor of Finance, The University of Alberta William Lyon Mackenzie-King Visiting Professor, Harvard University Research Association, National Bureau of Economic Research

  2. No Law >> Unenforced Law • No Drug Law • Merck and Pfizer sell clean heroin at low prices • Addicts, but no drug gangs • Drug Law enforced • No heroin • No addicts, no drug gangs • Drug Law, but imperfectly enforced • Drug gangs sells impure heroin at high prices • (Criminalized) addicts and (wealthy) drug gangs • Fewer addicts? Maybe, or maybe not … • Social welfare tradeoff • Externalities of more addicts v. externalities of drug gangs

  3. More Relevant Example • No Murder Law • Nice discussant comments • Paper’s mistakes not corrected • Murder Law enforced • Negative discussant comments • Improved paper • Murder Law, but imperfectly enforced • Nice people get negative comments and publish good papers • Scary people get nice comments and publish dumb papers • Social Welfare calculation • Greater collegiality v Needn’t read articles carefully

  4. Insider Trading • Reasons for insider trading laws • Lower cost of capital to business • Not necessarily of interest to established wealthy • Appeasement of IMF, World Bank, foreign investors • Does anyone pay attention to dead letters? • Allows arbitrary prosecution of politically disloyal locals • Al Capone v. Putin

  5. Posner: Probabilistic Enforcement • In the model, the law is either enforced or not • Perfect enforcement is impossible • Pr(convicted) x penalty > benefit  effective • Martha Stewart Effect? • The US missed most insider trading, but when they catch one, they crucify her • Low Pr(convicted)  high penalty if convicted? • Hillary Clinton Effect • Cattle futures insider trades generate little money • Benefit small  no point in risking trouble • Recruit Effect? • Japan rarely prosecutes insider trading cases • Low penalty OK if Pr(public shame) large?

  6. Is It Really Insider Trading? • Bris estimate of insider profits prior to M&A from 1990 to 1999

  7. Is It Really Insider Trading? • Bris estimate of insider profits prior to M&A from 1990 to 1999

  8. Latent Variables • Having enforced an insider trading law once doesn’t seem to suppress insider trading around M&A • Is insider trading around M&A events atypical? • Might “having enforced an insider trading law” be proxying for other factors that help a stock market function better?

  9. Latent Variables? • The specification used is • What if you run • Does an insider trading law or its enforcement matter over and above law and order in general?

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