Chapter 9 Mandatory Disclosure and Merit Discretion: A Reconsideration Outline I. INTRODUCTION II. SOME EVIDENCE ON THE EFFECTS OF MANDATORY DISCLOSURE Objectives: 1. 2. 3. Describe the results of three studies of the effects that mandatory disclosure on the distribution of securities had on securities prices and risk. Describe the results of Benston's study of financial statement disclosure. Discuss the critiques of these studies. A. 1. New Issue (or Prospectus) Disclosure Stigler a. Analysis of Price Effects (i) Method for Analysis of Price Effects (ii) Results on Price Effects b. The Analysis of the Effect on Risk (i) Method of Analysis of Effect on Risk (ii) Results of Analysis of Effect on Risk Jarrell a. Method b. Effect on Price c. Effect on Risk Simon a. Method b. Effect on Price c. Effect on Risk Secondary Market Disclosure -- Financial Statements Comments on the Studies and Further Evidence 2. 3. B. C. III. IS MANDATORY DISCLOSURE WORTHWHILE? Objectives: 1. 2. 3. Explain the argument that mandatory disclosure imposes costs that outweigh the benefits consequently making investors worse off. Identify and describe six market failure justifications for mandatory disclosure. Describe recent empirical evidence of the effects of mandatory and describe the results. A. Market Responses to the Adverse Selection Problem 1. Independent Reviews of Issuer Representations 2. Management Share Ownership 3. Taking on Debt 4. High Payout Policy Issuers Will Have an Incentive to Make the Appropriate Level of Disclosure Market Failures as a Justification for Mandatory Disclosure 1. Too Little Information 2. Investors Over-invest in Production of Information 3. Responses to the Market Failure Arguments 4. Social Gains From Reducing Security Price Inaccuracies 5. Standardization of Information Presentation 6. Credible Commitment Theory Recent Empirical Evidence Effects of Securities Laws on Securities Markets B. C. D. IV. PROPOSALS FOR REFORM Objectives: 1. 2. 3. Identify and describe five suggested changes in emphasis on mandatory disclosure and explain to what extent they have been followed in securities law in Canada. Describe two types of proposals for issuer choice. Describe the proposals for: (i) regulation by stock exchanges; (ii) investor regulation; (iii) reduced disclosure based on investor behaviour theory; and (iv) social disclosure. A. Change in Emphasis 1. Focus on the Secondary Market and Sophisticated Investors 2. Future-Oriented and Market Disclosure 3. Change of Emphasis re Liability and Enforcement 4. Agency Cost Emphasis Not Accuracy Enhancement 5. Permitting Silence and Lying Issuer Choice Proposals Regulation by Stock Exchanges Investor Regulation Reduced Disclosure Based on Investor Behaviour Theory Social Disclosure B. C. D. E. F. V. INTEREST GROUP THEORIES Objectives: 1. 2. Identify four interest groups that may have had an affect on <a href="/keyword/securities-regulation/" >securities regulation</a> and explain what their interests may have been. Identify interests within securities regulatory bodies that may influence the development o...