Mandatory disclosure sits at the foundation of modern securities regulation. Public companies must produce and share a wide variety of information about their condition and prospects, and they must do so on their own dime.
There can be little doubt that corporate information has great social value. Much has been written on the connection between more informative securities prices, on the one hand, and improved capital allocation and corporate governance, on the other. Nevertheless, it is equally as clear that having the government dictate the amount, format, and timing of corporate disclosure will leave society with less than the optimal level of each. Leaving disclosure-production decisions along each of these dimensions in bureaucrats’ hands means corporate disclosure that will, at best, reflect educated guesses as to what actual consumers of corporate information value.
Of course, markets in corporate information might address these problems, spurring the production of more information in better formats more frequently. They could also do much to tame overproduction along those same lines. But dumping the required-disclosure regime in favor of a pure market-based one has long been unpopular in the legal academy and policymaking circles. The consensus view appears to be that without disclosure floors established by the government, firms would—at a minimum—provide too little negative information about themselves. So, dumping compulsory disclosure altogether in favor of a system that allowed firms and information consumers to figure it out on their own has long been viewed with disfavor.
In our recent article, we set out an intermediate market-based approach toward achieving the optimal level of corporate disclosure: Create a transparent market for early-access rights to corporate information. In this market, firms could sell access to information that they will later release publicly. For example, when announcing news to the public at 1:00 p.m., they 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 in due time, market supply of early-access products and information-consumer demand for the same could generate improved public disclosure. All the while, the current floors of the mandatory-disclosure regime need not be changed.
This market, and these products, are now suppressed by the law. Under the status quo, 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, no trader would pay for what now must be provided to all investors (including the competition) at the same exact time under Regulation Fair Disclosure. For these reasons, firms cannot cover the costs of improved disclosure by serving up a bill to traders along with the 8-K.
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 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 avoid the 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 left better off than they are today.
The proposed market has additional benefits beyond its potential to improve the quality of corporate disclosure. For one thing, providing firms with a way to capture value from their information might lead them to take insider-trading compliance more seriously. For another, securities litigation might be improved. Judges and juries could use the information generated by the market (namely, whether or not a piece of information is in demand) to aid them in their materiality determinations. This would aid both anti-fraud and insider-trading actions. Perhaps more tantalizing, the SEC or judges could replace the overbroad fraud-on-the-market presumption with a subscribed-to-the-disclosure-release one. The latter presumption would better identify the actual victims of securities fraud, and perhaps yield a far better ratio between costs and deterrence benefits in private 10b-5 suits.
There are even broader benefits. Intellectual honesty about the ability of ordinary Joes to compete against speculating pros in the race to analyze and trade on new corporate information is laudable. Relatedly, analysis that adheres to the realities of contemporary securities markets would also represent a step forward for the field in and of itself. And perhaps news organizations, corporate watchdogs, labor unions, political parties, and anyone else looking to digest the news before redisseminating it with their own gloss would also value early access to corporate disclosure, thereby generating benefits that make the traditional capital-allocation and corporate governance-based focuses on this information look narrow.
Some will undoubtedly be suspicious of this proposal. Fostering the uneven distribution of 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, among other things, the main longstanding concern with the foundational aspect of modern securities law, while also leaving most ordinary investors better off than they are today.
This post comes to use from Kevin S. Haeberle, an assistant professor at the University of South Carolina Law School (leaving in July 2017 to become an associate professor at 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 recent article, “Making a Market for Corporate Disclosure,” available here.