Can Implicit Regulation Change Financial Market Behavior? Evidence from Spitzer's Attack on Market Timers.


This paper explores a natural experiment setup from the 2003-2004 mutual fund scandals to evaluate the effectiveness of implicit regulation on financial markets behavior. On average, buy-and-hold investors lost 218 basis points annually from 1998 to 2002 to market timers. Buy-and-hold investors suffered further economic losses from higher cash holdings, portfolio turnover, fund fees, and substantially lower fund performance that resulted from market timing fund churn. Intensified threat of regulation from the 2003-2004 scandals resulted in the industry's self-regulation by, among other things, voluntary adoption of fair value pricing. I find strong evidence that their self-regulation reduced the market timing motive as well as fund churn in international mutual funds in the post-2004 period, and reduced dilution by 93%.