Continuing the regulation theme of the previous post, Jain, Kim, and Rezaee give evidence that market liquidity improved following the passage of the Sarbanes-Oxlet Act in 2002.
SSRN-The Effect of The Sarbanes-Oxley Act of 2002 on Market Liquidity by Pankaj Jain, Jang-Chul Kim, Zabihollah Rezaee: "We detect wider spreads, lower depths, and higher adverse selection component of spreads in the period surrounding the reported financial scandals, indicating that liquidity measures were deteriorated as a result of those scandals. We find liquidity measures were improved following the passage of the Act. Our cross sectional analysis indicates that these changes in liquidity were pervasive and affected all types of firms, particularly large firms."
Interestingly, and somewhat different than the Aldridge paper, the authors find that regulation did have a positive impact on market efficiency (of course this is more than the normal SEC regulation that composed Aldridge's sample):
* "after the Act spreads declined, depths increased, and the adverse selection component of spreads decreased. These findings suggest that the Act and SEC related implementation rules were successful in improving market liquidity, creating a climate of investor confidence in financial information, and restoring normalcy in the financial markets particularly in the long-term."
Which fits nicely with why the law was passed :) Don;t look now, but maybe we got something right!
Jain, Pankaj, Kim, Jang-Chul and Rezaee, Zabihollah, "The Effect of The Sarbanes-Oxley Act of 2002 on Market Liquidity" (March 2004). 14th Annual Conference on Financial Economics and Accounting (FEA). http://ssrn.com/abstract=488142