The 13th International Convention of
the East Asian Economic Association
Grand Copthorne Waterfront Hotel
Singapore, October 19-20 2012
“Opportunities and Challenges for Asian Economies in the New Millennium”
Noel B. Del Castillo (Miriam College)
Regulating the Philippine stock market: the Securities Regulation Code and the information efficiency of Philippine stock prices
Noel B. Del Castillo*
This paper investigates the impact of the Securities Regulation Code (SRC) on the information efficiency of the Philippine stock prices. Research in other countries has shown that new regulation has had a long-term effect in improving the information efficiency of stock prices. The paper replicates those studies using a sample of 38 stocks drawn from listed Philippine companies for the period 1998-2008. The results show an improvement in information efficiency over the period and the significant impact of the SRC.
Keywords: Securities regulation, Philippine stock market, Event studies
JEL No. G14, G28, G38, K22
J. Financial Institutions and Markets
R. Institutions and Economic Analysis
*The author benefitted greatly from the comments of Emmanuel de Dios and Ma. Nimfa Mendoza, adviser and reader to the thesis version of this paper. He is also grateful to the valuable assistance provided by Paul Mariano and other colleagues and schoolmates at the Graduate School of the School of Economics, University of the Philippines Diliman. I. Introduction
On 19 July 2000, then-President Joseph Ejercito Estrada signed Republic Act No. 8799 and the Securities Regulation Code (SRC) finally became law. The passage of the act was historic since it resulted in the reorganization of the two of the most important financial institutions in the country: the Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE).
The SRC had been pending in both houses of Congress for more than five years prior to this (SEC, 2001), but its final passage was precipitated by the event that transpired just a year before: the BW Resources stock-price manipulation scandal (BW scandal).
The BW scandal is regarded as the biggest stock market fraud in Philippine history (Pascual and Lim, 2001; Antonio and Abola, 2002). From a mere P2 per share at the start of 1999, the share price of BW skyrocketed to P107 by October 1999, a spectacular price increase of 5,250 percent in just 10 months. Investigations by both the SEC and PSE implicated the major shareholder of BW Resources Corporation, Mr Dante Tan, along with some brokers who allegedly connived with him to commit various forms of stock price manipulation including wash sales (Pascual and Lim, 2001). Six of the brokers involved were current or past members of the Board of Governors of the PSE (Pascual and Lim, 2001, 119). Even today, however, the accused still await sentencing, since the case has only reached the Court of Appeals after a long period at the Pasig Regional Trial Court (Pazzibugan, 2009).
Meanwhile, the need to immediately restore the credibility in the Philippine stock market has become a paramount concern of the government. Both the Senate and the House “fast-tracked the enactment (of) the Securities Regulation Code” (SEC, 2001, 64) to provide an immediate response to the havoc the scandal wreaked on the Philippine securities market.
The BW scandal became possible because of certain institutional characteristics inherent in both SEC and PSE that weakened their respective capabilities as corporate watchdogs. Among such characteristics, as Pascual and Lim (2001) observe, are the dominance of brokers in the conduct of business of the bourse as well as the weak disclosure rules that could be easily circumvented, thus avoiding required disclosures...