The Effectiveness of Britain's Financial Service Authority: An Economic Analysis

Abstract

Sweeping regulatory reforms in Britain resulted in the formation of the Financial Services Authority (FSA). Because greater transparency of information is a major objective for this Act, shifting from one information system to another has re-distributive effects. We identify these effects at a sector level and their drivers at the firm level. At a sector level, FSA has generally increased the precision of investors’ priors reducing the information risk component of the cost of capital. At a firm level, large firms act as “Stackelberg leaders” in voluntary disclosure games. FSA regulation shifts power from leaders to “followers”.Disclosure, Regulation, Game Theory, Stackelberg Leader, Cost of Capital: information asymmetry