The role of enforcement strategy in disclosure regulations

The advanced world has witnessed significant increases in securities regulation in recent years. Regulators and academics have shown overwhelming agreement on the importance of enforcement in delivering desirable regulatory outcomes. However, the question of what constitute effective enforcement is less clear. Borrowing from the law and economics literature, this thesis posits that a regulator's enforcement strategy is an important factor in effective enforcement. Focusing on the responsive enforcement strategy (Ayres and Braithwaite 1992), one of the most established and applied enforcement strategies, this thesis examines the impacts of the adoption by the Australian regulator of the strategy of corporate compliance with its continuous disclosure regulations. With compliance inferred from changes in the analysts' information environment and in market liquidity, results show that after full adoption of the responsive enforcement strategy, analysts' forecast error and forecast dispersion is incrementally reduced. In addition, as implied in analysts' forecasts (Barron et al. 1998), the precision of and analysts' reliance on public information have incrementally increased. With respect to market liquidity, a difference-in-difference approach is applied to control for influences from concurrent technological and economic developments. Benchmarking with the New Zealand market, bid-ask spread (turnover rate) has shown significant decreases (increases) as the strategy was being implemented. The improvements found in analysts' information and market liquidity are consistent with the strategy being successful in enhancing corporate compliance with the continuous disclosure requirements. The findings extend the enforcement literature and inform regulators by demonstrating the importance of devising an appropriate enforcement strategy for securing compliance and favorable regulatory outcomes.