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Mandatory Disclosure: A Behavioral Analysis

Stephen M. Bainbridge

University of California, Los Angeles (UCLA) - School of Law

University of Cincinnati Law Review, Vol. 68, pp. 1023-1060, Summer 2000

Mandatory disclosure is a defining characteristic of U.S. securities regulation. Issuers selling securities in a public offering must file a registration statement with the SEC containing detailed disclosures, and thereafter comply with the periodic disclosure regime. This regime has been highly controversial among legal academics. Some scholars argue market forces will produce optimal levels of disclosure in a regime of voluntary disclosure, while others argue that various market failures necessitate a legal mandatory disclosure system. To date, however, both sides in this debate have assumed, inter alia, that market actors rationally pursue wealth maximization goals. In contrast, this paper draws on the emergent behavioral economics literature to ask whether systematic departures from rationality, such as herd behavior or the status quo bias, might result in a capital market failure. The paper concludes that such a market failure could occur, especially in emerging markets, but also contends that one should not jump to the conclusion that legal intervention in the form of a mandatory disclosure system is necessary, especially insofar as the highly evolved U.S. capital markets are concerned. The paper concludes with a cautionary note against the potential for behavioral economics to be glibly invoked as a justification for government intervention.

Number of Pages in PDF File: 43

Keywords: mandatory disclosure, securities regulation, behavioral economics

JEL Classification: G38, K22

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Date posted: November 21, 2002  

Suggested Citation

Bainbridge, Stephen M., Mandatory Disclosure: A Behavioral Analysis. University of Cincinnati Law Review, Vol. 68, pp. 1023-1060, Summer 2000. Available at SSRN: http://ssrn.com/abstract=329880 or http://dx.doi.org/10.2139/ssrn.329880

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Stephen Mark Bainbridge (Contact Author)
University of California, Los Angeles (UCLA) - School of Law ( email )
385 Charles E. Young Dr. East
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Los Angeles, CA 90095-1476
United States
310-206-1599 (Phone)
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HOME PAGE: http://www.professorbainbridge.com
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