Guardians of Market Integrity: Political Institutions, Regulatory Independence, and Stock Market Development

Abstract

Prior approaches to the politics of stock market development associate consensual political institutions with the stagnation rather than the growth of equity markets. Other research suggests that independent regulatory agencies will almost invariably be captured by industry interests thereby lessening their ability to protect minority shareholders and retail investors. This paper challenges both of these assertions.While politicians do have difficulty credibly committing to investor protection and market integrity, more numerous veto players, proportional elections, and regulatory independence can at least partially ameliorate their credibility problems. Using preexisting measures of political institutions as well as an original dataset of public and private securities market regulatory organizations, I find that consensualism and regulators’ political independence are positively related to stock market size and performance. Furthermore, regulatory independence appears to be especially important for stock market development when consensual political institutions are absent.