Does Securities Regulation Matter? Mandatory Disclosure, Excess Stock Volatility and the U.S. 1934 Securities Exchange Act

We examine whether the U.S. Securities Exchange Act of 1934 significantly stabilized the market by introducing mandatory disclosure of information. We argue that mandatory information disclosure can curb stock manipulation by enhancing transparency, thereby reducing excess stock volatility. After a comprehensive assessment of the voluntary disclosure practices of NYSE-listed companies before 1934, we group the companies and find that those with poor disclosure practices experienced a significantly greater reduction in volatility after the implementation of the 1934 Act compared to those with good disclosure practices. Further analysis reveals that the liquidity of these poorly disclosing companies also improved significantly more than that of the better disclosing companies, and the improvement in liquidity was linked to the decrease in their volatility. Given that one of the key intentions of the legislators was to reduce excess market volatility through the Act, our findings provide empirical support for this legislative intent.