Law, Share Price Accuracy and Economic Performance: The New Evidence
Merritt B. Fox
Columbia University - Law School
University of Iowa - Henry B. Tippie College of Business
National Bureau of Economic Research (NBER); University of Alberta - Department of Finance and Statistical Analysis
Bernard Yin Yeung
National University of Singapore - Business School
August 20, 2003
The value of mandatory securities disclosure is intensely debated. Two big questions occupy much of the attention: Do more accurate share prices contribute to the efficient provision of goods and services in the economy? Even if they do, will mandatory disclosure effectively contribute to share price accuracy? To date, the debate has been largely theoretical. This Article sheds much needed empirical light on the matter. After introducing a new technique from financial economics - R2 - to measure share price accuracy, the Article starts by discussing recent R2 studies by ourselves and others addressing the first question. Using both cross country and cross industry comparisons, the results show that more accurate share prices improve capital allocation and thus do in fact contribute to the efficient provision of goods and services in the economy. The Article then presents a new R2 study that we have conducted addressing the second question. The study examines the effect of a December 1980 change in the SEC's disclosure rule requiring every issuer's filings to contain a section with management's discussion and analysis of the issuer's financial results (the "MD&A" rule). The change required managers to disclose any material information suggesting that the issuer's most recent results are not necessarily indicative of future results. Our study shows that share prices became more accurate a result of the changed rule, suggesting that mandatory disclosure can in fact be effective.
Number of Pages in PDF File: 70
Keywords: Capital Allocation, Stock Price Informativeness, Disclosure, Regulation
JEL Classification: G2, G3
Date posted: October 8, 2003
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