The Influence of Cross-Border Cooperation on Equity Market Liquidity

Abstract

This paper examines how cooperation between national securities regulators affects equity market liquidity, using the International Organization of Securities Commissions’ (IOSCO’s) Multilateral Memorandum of Understanding (MMoU) as a shock to cooperation. The MMoU was set up to protect investors by fostering cooperation between regulators, and fill gaps in cross-border regulatory capacities that historically exposed investors to information asymmetry, agency costs, and expropriation risks. Consistent with a deterrent effect, I find that when a regulator enters the MMoU network, the markets it supervises experience enhanced liquidity, as indicated by narrower quoted bid-ask spreads. Incremental to this effect, I find larger liquidity improvements in when linkages are formed between the precise regulators that co-supervise a firm affiliated with both markets. Cross-sectional tests show that legal, cultural, economic, and firm-level attributes condition the effect; these results shed light on how cooperation works and what makes it effective. Coordination is one way that regulators who are grappling with the interjurisdictional complexities of increasingly interconnected markets can protect investors and enhance liquidity.