What Actually Works in Securities Law? A Global Perspective

Why do some countries attract deep, active equity markets, while others struggle to build investor trust? A landmark study by economists Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer set out to answer that question by comparing securities laws across 49 countries. The results challenge some long-held assumptions about what makes markets thrive.

At the heart of their findings lies a striking conclusion: the most important ingredients for stock market development are not muscular regulators or sweeping public enforcement powers. Instead, what matters most is whether the law requires companies to disclose meaningful information—and whether investors can take legal action when that information turns out to be misleading.

The study found that countries with stronger disclosure requirements—rules about revealing executive pay, ownership structures, and related-party transactions—tend to have more robust stock markets. It’s a reminder that transparency isn’t just good governance; it’s a growth strategy. Investors are more likely to allocate capital where they feel they understand the risks—and can price them.

Equally important is how the legal system handles breaches. Where laws lower the burden of proof for investors trying to recover damages, stock markets tend to flourish. When investors can sue issuers, underwriters, or auditors for misleading prospectuses—and have a realistic chance of winning—they show up with their capital. The potential for private litigation does more to enforce good behaviour than the looming threat of government sanctions.

Perhaps most surprisingly, the study found little evidence that public enforcement—through agencies like securities commissions—plays a significant role in market development. Powers like subpoena rights, criminal penalties, and administrative orders were not strongly correlated with healthier capital markets. In practice, these mechanisms often suffer from underuse, political interference, or limited reach, particularly in less developed legal systems.

For policymakers, the implications are clear. Building investor confidence is less about punishing bad actors after the fact, and more about creating a system where companies are upfront with information and investors are empowered to hold them to account. For companies navigating global capital markets this research offers a powerful reminder: trust is built through transparency, and protection lies in the clarity and credibility of private enforcement, not just the presence of public regulators.

The development of a stock market, in the end, hinges less on who’s policing it, and more on how well the rules of the game are written—and whether they’re enforceable in court.

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Reference: La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). What works in securities laws? The Journal of Finance, 61(1), 1–32. https://doi.org/10.1111/j.1540-6261.2006.00828.x