If the equity premium puzzle is the result of security

mispricing, then there is an arbitrage opportunity. It

means that investor can gain by borrowing at the
Treasury bill rate and investing in stocks. Borrowing
limitations and transaction costs may reduce this
arbitrage profit, but not eliminate it. The concern
about the fair and ethical stock market trading
require imposing discipline on individuals and
institutional investors. The organized stock
exchanges introduce surveillance of all transactions
at the exchanges. Computerized systems are
installed to detect unusual trading of any particular
stock. Any abnormal price or trading volume of
particular stock or unusual trading practices of
market participants is investigated. Additional
regulations on imposing good corporate governance
practice for listed companies are imposed through
introduced corporate governance codes.
Regulations require disclosure of financial
statements, having a majority of independent
directors (not employees of the companies) on their
boards of directors. Such requirements are aimed at
reducing existing or potential conflicts of interest
between management and minority as well as
majority shareholders, focusing management on
maximizing stock value for company shareholders.
Specific regulation concerns are related to
restrictions on trading in case of market downturns.
Stock exchanges can impose circuit breakers, which
are restrictions on trading when stock prices or
stock indexes reaches a specified threshold level.
The necessity of such restriction became vivid
during stock market crashes, e.g of NYSE in October
1987 and the later ones. When market maker
swamp market with sell orders, stock prices cannot
reflect the fair value any longer and move into a
freefall. The market experiences huge liquidity
crisis, which feeds panic and exacerbates the price
decline. As a result of such experience, in order to
provide time for market participants to regroup and
obtain backup sources of liquidity, a series of circuit
breakers are put to use. may be imposed on
particular stocks if stock exchanges believe that
market participants need more time to receive and
absorb material information, which can affect stock
price. Such trading halts are imposed of stocks that
are associated with mergers and acquisitions,
earning reports, lawsuits and other important news.
The purpose of them is to ensure that market has
complete information before trading on the news. A
halt may last a few minutes, hours or several days.
Trading is resumed after it is believed that the
market has complete information. This does not
prevent investors from a trading loss in response
100 to the news. However, it can prevent from
excessive optimism or pessimism about a stock, and
can reduce stock market volatility