The Effectiveness of Oversight Regulations - A Dynamic Life Cycle Perspective

Abstract

We analyze how the effectiveness of oversight regulations evolves over time. Using the case of a financial reporting enforcement regulation in Germany, we show that the effectiveness follows a dynamic life cycle. Specifically, we find that anticipation effects exist around the announcement of the new regulation. Moreover, a substantial amount of effectiveness unfolds after the regulation becomes legally effective and when individuals have direct regulatory contacts with the enforcement body. We attribute the gradual unfolding of the regulation to uncertainties about a new regulation’s de facto implementation and informational constraints of regulatory subjects, which are resolved by direct regulatory contacts. Furthermore, we provide evidence that the effectiveness of oversight regulations fades over time. We investigate potential mechanisms and find that lower enforcement intensity and decreasing public pressure are mainly behind the fading. Collectively, our findings suggest that the effectiveness of oversight regulations follows an inverse V-shape with a gradual ‘ramping up’ effect around its implementation and a ‘fading’ effect after a few years.