and shows that the two main regulatory objectives are investor protection and mar-
ket quality.^9 Investor protection means that investors are provided with material in-
formation, and are protected through monitoring and enforcement. (IOSCO [2002]
argues that the most important means for ensuring investor protection is to require
full disclosure of information material to investors’ decisions.) High-quality markets
are fair, orderly, efficient, and free from abuse and misconduct. Regulators have long
recognized that investor protection and market quality are linked. However, the opti-
mal disclosure system for a particular stock exchange is not obvious, since disclosure
13.3 CORPORATE DISCLOSURE, LIQUIDITY, AND THE COST OF CAPITAL 13 • 5Investor Protection
Investors are provided with material informa-
tion, and are protected through monitoring
and enforcement.
Specifically:
- Provide investors with material informa-
tion. - Monitor and enforce market rules.
- Inhibit fraud in the public offering, trad-
ing, voting and tendering of securities. - Seek comparability of financial informa-
tion (allow investors to compare compa-
nies across industries and domiciles).
Exhibit 13.1. Broad Objectives for the Regulation of Investor-Oriented Equity Markets.
Market Quality
Markets are fair, orderly, efficient, and free
from abuse and misconduct.- Promote equitable access to information
and trading opportunities (market fair-
ness). - Enhance liquidity and reduce transaction
costs (market efficiency). - Contribute to freedom from abuse
through monitoring and enforcement. - Foster investor confidence.
- Facilitate capital formation.
- Seek conditions in which prices reflect in-
vestor perceptions of value without being
arbitrary or capricious (market orderli-
ness).
Objectives:
Principles:
1.Cost Effectiveness.The cost of market regulation should be proportionate to the benefits it
secures.
2.Market Freedom and Flexibility.Regulation should not impede competition and market
evolution.
3.Transparent Financial Reporting and Full and Complete Disclosure.
4.Equal Treatment of Foreign and Domestic Firms.
Source:Frost and Lang (1996).
(^9) For further discussion of these concepts, see International Organization of Securities Commissions
(IOSCO, 2002), U.S. Securities and Exchange Commission (1987), and Securities and Investment Board
(1994). IOSCO includes the reduction of systematic risk as a third regulatory objective. Also refer to
Meier (1998), who introduces a conceptual model of “stock exchange excellence.” The model consists of
12 stock exchange quality factors, including liquidity, cost-effectiveness, disclosure, market regulation,
clearing and settlement, and market architecture.