Selective Disclosures in the Public Capital Markets

Publicly-traded corporations contain a wealth of non-public material information. Insider trading prohibitions limit the ability of corporate insiders to profit from this information advantage through trades in their own corporations' securities. Some may view the SEC's recently promulgated Regulation FD as complementary to restrictions on insider trading, limiting the ability of firms to confer on outsiders a similar inside information advantage through selective disclosures. The employment of selective disclosures to favor outside investors and analysts, nonetheless, may provide a number of benefits to all shareholders of a corporation. Selective disclosures, for example, may help subsidize the formation of blocks of shares that help monitor managers for agency problems. Selective disclosures also may provide firms a low-cost and flexible means of conveying even confidential information indirectly into the capital markets. The Article contends that the real risk of selective disclosures lies with the potential for managers to co-opt such disclosures for their own opportunistic endeavors. Regulation FD, however, represents an untailored and overly broad response to the risk of opportunism. Instead, the Article sets forth a number of more tailored regulatory responses that allow firms to provide selective disclosures in situations where overall shareholder welfare is enhanced while curtailing more opportunistic uses. Prepared for the Dykstra Corporate Governance Symposium at the University of California, Davis School of Law (2001)