We all know that our securities regulatory regime is predominantly a disclosure regime, meaning the regulators, for the most part, don’t impose substantive regulations on securities issuers, but require only accurate, timely disclosure of certain information. And as against a more intrusive, substantive regime, I think this is preferable, even in its current, fairly intrusive form. But too often disclosure is presumed by commentators (and regulators) to be fairly costless — meaning that, even if it doesn’t do what it’s supposed to do, it imposes no great cost, and if it succeeds it does so quite cheaply. This is what Larry means when he refers to regulations as “chicken soup.” I think this presumption is often under-supported.
What I intend to do in this occasional series of blog posts is raise a few novel (and, while we’re at it, a few old-but-forgotten, to say nothing of a few old-and-remembered-but-worthy-of-emphasis) criticisms of our disclosure regime. I should note at the outset that, although I have largely come to the conclusion that the costs outweigh the benefits here (oops — did I spoil the surprise?), there are surely benefits to a system of mandatory disclosure. And while I will do some weighing of costs and benefits along the way (along with some criticism of presumed benefits that aren’t), I don’t intend to provide a full cost-benefit accounting; instead, I intend to focus on the costs to the general exclusion of the benefits. This arises not out of a wish to tip the scales (I know our readers are far too sophisticated to fall for that anyway), but rather a) to correct the existing imbalance, and b) to stress what I think is new in my analysis rather that devote scarce resources to re-hashing what we already know.
So let me start by explaining what I mean by “correcting the existing imbalance.” As I noted above, I perceive that many commentators are far too cavalier about our securities disclosure regime, often glomming on to recommendations for increased disclosure as near-costless measures. In particular, I see this in the debate over executive compensation, where there are a few proposals for substantive regulation floating around out there along with some more restrained ones for increased disclosure (and, of course, there is the SEC’s actual proposal for more disclosure). Invariably, critics of substantive regulations are quick to embrace disclosure as they dismiss the more intrusive regulatory proposals. For a recent example see Larry (with a partial retraction here and a pretty full retraction here). For another, see John Core, Wayne Guay and Randall Thomas, Is U.S. CEO Compensation Inefficient Pay without Performance?, 103 Mich. L. Rev. 1142, 1181 (2005). The authors there roundly criticize Bebchuk and Friedâ€™s book: â€œ[T]he authors have offered no persuasive evidence that CEO pay contracts are suboptimal.â€? Nevertheless, while dismissing B&Fâ€™s more sweeping proposals, they â€œagree that better disclosure on the value of executive pensions and the exercise and sale of options and shares would be beneficial.â€? They donâ€™t support this contention in their own paper, and they spend the entire article undercutting B&Fâ€™s justifications. One canâ€™t help but conclude that the authors view the statement as somewhat gratuitous, but cheaply so. (In later posts I’ll share some thoughts about why the disclosure regs may, in fact, be quite costly).
I am certainly willing to accept that this is merely a rhetorical ploy (“disclosure regs are better than the alternative, so let’s make it seem like we really like ’em as a diversion!”) or a choice of a second best from among a set of imperfect alternatives (“disclosure regs are better than the alternative, so let’s root for ’em!”). But I fear that acquiescence to disclosure regulation is undertaken by many of its casual adherents without sufficient reflection. It is rare to find much criticism of mere disclosure except of the chicken soup variety. As Michael Guttentag puts it in a recent article (itself a rare exception that takes seriously (but ultimately rejects) the notion that disclosure may have more than superficial net costs), “[a]n immense regulatory edifice is built on an unsubstantiated faith in the efficacy of requiring disclosure.” SSRN version here.
My goal here, then, is to provide some (I think quite compelling) (but then I’m biased) arguments against disclosure regulations. Because, of course, one of the alternatives among the set of imperfect alternatives is “do nothing.”
Bill has just provided us with one of the most succinct examples of the sort of scholarship I am wary of. Nicely done, Bill. It’s a little bit like seeing Cardozo’s punctilio quote in a fiduciary duty case — it purports to represent proof of the inevitable conclusion, when it is, of course, nothing of the sort.
I’m assuming, of course, that your comment was facetious.
But according to Justice Brandeis: “Sunlight is said to be the best of disinfectants: electric light the most efficient policeman.”
Nice post Geoff. I am looking forward to this series. I think that hands-on analysis of the costs and benefits of disclosure an issue that is relevant to corporate scholarship, but in other areas as well. For example, in my work on slotting allowances and payola, these types of arguments are frequently made, i.e. “while we do not want to add substantive regulations, disclosure is always a good thing.”