Financial market regulation and investor behavior

The level of financial market regulation is often the objective of debates with the supporters claiming that it protects all interested parties and the opponents reacting that it is discouraging investors. In recent years, especially due to the financial crisis, we see more and more laws aiming at transparency and increased disclosures, as well as appropriate risk profiling, so that each investor is matched to the investments that are appropriate for his or her risk profile. At the same time a lot of attention is paid to properly informing investors so that the investment decision he or she makes is well informed. On one hand, one can claim that this approach is well intended and that investors can make choices after having received all the necessary information. Consequently, they tend to spend more time maintaining their investment assets or portfolio in order to realize better returns. On the other hand, one can observe that such a process is cumbersome and not all investors are willing to go through it. As a result, they may be reluctant to invest and abstain from doing so. We use data from the Organization for Economic Cooperation and Development (OECD) countries to investigate whether financial market regulation affects customer behavior and, if yes, in what direction. Our sample size consists of 36 OECD countries and our focus is primarily on the 28 European Union (EU) countries. We use linear regression to examine the relationship between the financial market regulation indicators (the independent variables) and the investor behavior metrics (the dependent variables). The investor behavior metrics reflect the intention of the investors to remain in a financial market, as is measured indicatively by the market cap, the trading volume, the market performance. The financial market regulation indicators (are defined by the authors) measure the extent to which a country has implemented in its investor agreements and contracts the articles that the relevant regulation provisions for. Our findings can be of use to policymakers, if they want to further strengthen their case or for the financial intermediaries if they wish to explain the rationale to candidate investors.

Keywords: financial market regulation; investor behavior; transparency; disclosures; investment returns.

JEL classification: G10, G11, G20, G40