Public-company information has great social value. However, it is widely thought that left to their own devices, firms will under-disclose information about their condition and prospects. This thinking is embodied in the mandatory-disclosure regime that sits at the foundation of modern securities law. But government-compelled disclosure in this area—including piecemeal additions to the disclosure regime based on the latest Washington fad—leaves much to be desired.
In our recent article, Making a Market for Corporate Disclosure, we argue that the under-disclosure concern could be addressed in a far broader way by constructing a well-regulated market for tiered access to corporate disclosure. We contemplate a transparent market for early-access rights to corporate information. In this market, firms could sell access to information that they soon would release to the public. For example, when they have new information that they are willing to share with the public, firms could offer a well-advertised early peek—say, starting at 11:00 a.m.—to anyone willing to pay the market price for it. So long as firms had to make any selectively released disclosure products with material information available to the public by, say, 1:00 p.m., market supply of and demand for those products could generate improved public disclosure. All the while, the current floors of mandatory disclosure need not be changed.
This market for early access is, and these products are, now suppressed by the law and closely related attitudes regarding tiered information release, though not because of any disclosure requirement or insider-trading prohibition. The problem is instead that additional disclosure comes with many costs (including those relating to an imperfect securities-fraud regime that laudably seeks to punish false and misleading corporate statements). At the same time, under the status quo, no trader would pay for what must be provided to all investors (including the competition) at the same time under Regulation Fair Disclosure. Nor would executives be interested in testing even misguided prosecutorial understandings of insider-trading doctrine and policy. For these reasons, firms cannot cover the costs of, for example, improved MD&A by serving up a bill to traders along with the 10-K, and therefore lack the incentive to supply it.
To be sure, it is unlikely that those merely investing for a long-term, market-wide risk premium would pay for early access to public-company information. It follows that they would be operating with less information about firms’ fundamental values than subscribing high-speed traders, hedge funds, and actively managed mutual funds. But for the everyday individuals who invest directly or through index funds and the like, corporate information is of very little—if any—trading value. In fact, under the current information-dissemination regime, its release endangers them. These investors often get burned by information asymmetries when operating in the stock market in the moments after new information is released today. Under our proposal, however, they could better avoid periods in which speculating pros are battling it out to determine the import of new information for securities prices, and then safely return to the market to complete their non-time-sensitive trading. In the end, they would be better off than they are today.
Some will undoubtedly be suspicious of this proposal. Fostering the uneven distribution of valuable information—even if only momentarily—is antithetical to the approach of much modern securities law. But as we tease in this post, creating transparent early-release windows would actually have the potential to address the main longstanding concern with the foundational aspect of modern securities law (the underproduction of public-company disclosure) without detracting from another broader concern of policymakers (protecting ordinary investors). Indeed, a careful read of our article shows that the only principled reasons for doubting this approach to corporate disclosure relate to its effects on information-trading pros, who get this information for free under the law today.
This post comes to use from Kevin S. Haeberle, an associate professor at the William & Mary Law School, and M. Todd Henderson, the Michael J. Marks Professor of Law and Mark Claster Mamolen Research Scholar at the University of Chicago Law School. The post is based on their article, “Making a Market for Corporate Disclosure,” available here and forthcoming in the Yale Journal on Regulation.