Law, Share Price Accuracy and Economic Performance: The New Evidence

Mandatory disclosure has been at the core of U.S. securities regulation since its adoption in the early 1930s. For many decades, this fixture of our financial system was accepted with little examination. Over the last twenty years, however, mandatory disclosure has been subject to intensifying intellectual crosscurrents. Some commentators hold out the U.S. system as the standard for the world. They argue that adoption by other countries of a U.S.-styled system, with its greater corporate transparency, would enhance their economic performance. Other commentators, in contrast, insist that the U.S. mandatory disclosure regime represents a mistake, not a model. These crosscurrents are reflected as well in the actions and words of policymakers. On the one hand, Congress, responding to the recent spate of corporate scandals, enacted the Sarbanes-Oxley Act, which amended the U.S. securities laws to require what is probably the greatest increase in disclosure since their inception. On the other hand, the Council of Economic Advisors, in its discussion of these reforms in the 2003 Economic Report of the President, agnostically stated that whether SEC-enforced disclosure rules actually improve the quality of information that investors receive remains a subject of debate among researchers almost 70 years after the SEC\u27s creation. Most debate between these contending positions has been at the level of theory. The surprisingly small amount of empirical research brought to bear on the issues involved is relatively equivocal in its implications. This Article introduces to the legal debate important new empirical evidence based on recent research of the authors and others that, while not definitively settling the overall question of mandatory disclosure\u27s desirability, helps resolve two central, highly disputed questions: Is the efficiency of the real economy (the actual production of goods and services) enhanced when share prices become more accurate? Do rules mandating that issuers make public disclosures actually increase share price accuracy? Contrary to the arguments advanced by opponents of mandatory disclosure, the empirical evidence presented here suggests that both of these questions should be answered in the affirmative