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Do Investors Value High Levels of Regulation

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  • Tim Jenkinson
  • Tarun Ramadorai

Abstract

It is often taken as axiomatic that investors prefer high levels of regulation. Yet companies have increasingly chosen to list on stock exchanges with lower regulatory requirements. In this paper we analyse whether investors value high regulatory standards for quoted companies. We use the unusual regulatory environment observed in London – two alternative regulatory regimes with the same trading technology – to analyse these issues. We focus on 218 firms that chose to switch their trading ‘down’ from the highly regulated Main market to the lightly regulated AIM market, and 56 firms that moved ‘up’ to the Main market. Switching firms on average experience down (up) announcement returns of approximately -4% (+5%). However these initial reactions are reversed over several months after the actual switch. Our results suggest that particular investor clienteles exist for the two markets, and that other investors who place little value on the higher regulatory standards become the relevant marginal investors when companies switch to AIM.

Suggested Citation

  • Tim Jenkinson & Tarun Ramadorai, 2008. "Do Investors Value High Levels of Regulation," OFRC Working Papers Series 2008fe18, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:2008fe18
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2008fe18.pdf
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    Keywords

    stock markets; listing; regulation; switching;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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