Stavros Gadinis

The SEC and the Financial Industry: Evidence from Enforcement against Broker-Dealers

The Securities and Exchange Commission plays a central part in the U.S. regulatory framework for the supervision of the financial industry. How has the SEC carried out this mission? Despite recurrent crises, systematic studies of SEC performance data are suprisingly scarce. As the SEC reforms itself to address the shortcomings revealed in 2007-2008, a systematic examination of the agencys past record can help identify priorities and evaluate the agencys renewed efforts. This study takes a first step in studying empirically SEC enforcement against investment banks and brokerage houses, examining the agencys record in the period right before the 2007-2008 crisis. This data suggests that defendants associated with big firms fared better in SEC enforcement actions as compared to defendants associated with smaller firms in three important dimensions. First, SEC actions against big firms were more likely to involve corporate liability exclusively, with no individuals subject to any regulatory action. Second, big-firm defendants were more likely to end up in administrative rather than court proceedings, controlling for types of violation and levels of harm to investors. Third, within administrative proceedings, big-firm employees were likely to receive lower sanctions, notably temporary or permanent bars from the industry. These patterns have important implications for major debates concerning corporate liability, regulatory capture and the public and private enforcement of securities laws.

Market Structure for Institutional Investors: Comparing the U.S. and the E.U. Regimes

In 2007, both the U.S. and the E.U. implemented sweeping reforms in the regulation of stock exchange trading and market structure, following diametrically opposite approaches. While the E.U. effort is deregulatory and decentralized, allowing investors choices to determine how different marketplaces interact, U.S. rules are detailed and interventionist, mandating specific principles for the interaction of orders. To explore the impact of these surprising choices of regulatory design, this article focuses on institutional investors, who have come to dominate stock exchange trading in recent years. Because these investors trade in large blocks, their orders may affect the stock price to their detriment, increasing their liquidity costs. However, the new U.S. rules limit institutional investors flexibility in choosing a trading strategy that would reduce their liquidity costs effectively. As a result, these rules introduce unnecessary volatility in the market and may harm the informational value of stock prices. Instead, the European framework relies on disclosure of quote and last sale information, and helps investors monitor market participants more successfully.

Can Company Disclosures Discipline State-Appointed Managers? Evidence from Greek Privatizations

Abstract Conventional economic theory portrays privatization as a transformative event for a company, even when it is partial and the state maintains control. According to this view, private investors have stronger incentives than voters to monitor management performance and constrain side-payments to political allies of the government. But how exactly can private investors discipline managers they cannot fire? Proponents of privatization place their hopes on disclosure obligations under securities laws, triggered by privatized companies’ stock exchange listings. They argue that, because company disclosures can reveal side-payments to government allies and cause private investors to abandon the stock, management should avoid political favoritism after a stock exchange listing. The Article explores whether investors responded to indications of political favoritism as the above theory would predict. Case study evidence comes from major privatizations in Greece during the last two decades in telecommunications, energy, and gaming. The Article examines the public disclosures of partially privatized companies in two key areas where the risk of political side-deals and corruption remains high: contracts with suppliers and relationships with labor. Greek companies’ disclosure documents included clear indications that payouts to suppliers and labor continued to increase during the period of partial privatization. However, these companies’ stocks remained attractive to investors.