The Impact of Regulation and Transparency in the Cryptocurrency Market (with Edith Leung)
Cryptocurrencies are mostly issued and traded outside traditional regulated financial markets. Financial regulators and governments have started advocating for regulation of cryptocurrency markets, but regulatory efforts so far lack a comprehensive approach due to the ambiguous nature of cryptocurrencies. We empirically examine if cryptocurrency investors perceive regulation as net beneficial or costly, and whether cross-sectional differences in cryptocurrency characteristics and transparency affect this reaction. Using a sample of around 1,300 cryptocurrencies and 148 regulation news events, we find that on average, investors react negatively to events that increase the likelihood of regulation. We find that the negative reaction is mainly driven by news about securities regulation of ICOs and cryptocurrency exchanges. However, the negative reaction is less pronounced for cryptocurrencies with higher expert ratings for transparency, management competence and the underlying business idea, and for those cryptocurrencies that engage more with followers on social media. We conclude that cryptocurrency investors expect regulation to be costly on average, but less so for cryptocurrencies with a better information environment or that are better positioned to deal with changes in regulatory requirements.
Market Discipline and Supervisory Preference for Private Information: Evidence from Regulatory Risk Reporting in Europe (with Ferdinand Elfers)
Investors’ incentives to monitor banks’ public risk information are attenuated when the prudential supervisor is known to operate on private information in order to facilitate preemptive supervisory interventions. In this paper we use variation in the confidential reporting requirements under the COREP framework across European countries between 2007 and 2013 as an indicator for such a supervisory preference for private information. We find that a stronger reliance on confidential reporting requirements is associated with a significant decrease in trading volume around the publication of banks’ annual reports. This relation is stronger where the supervisor has more regulatory resources, indicating a better ability to act on its private information. Our study adds to the literature on the influence of institutional characteristics on market discipline by highlighting the role of supervisory information.