Boilerplate and the Impact of Disclosure in Securities Dealmaking

Abstract

Capital markets deals, like many kinds of business transactions, are built on a foundation of copied and recycled language — what many call boilerplate. Regulators and the bar periodically call for less reliance on boilerplate, but despite these pressures, boilerplate remains a fixture of ever-growing securities disclosures. This Article explores why boilerplate persists and how it affects investors, showing that boilerplate may have a more complex role than commonly recognized. This Article does so by developing a theory on the effect of boilerplate in securities disclosure — a context that is little studied despite a wealth of literature on boilerplate in other settings — and analyzes disclosure empirically using language processing techniques on a dataset of initial public offering disclosure spanning twenty years, from 1996 to 2015. The data shows that in the aggregate, the use of boilerplate is associated with some efficiency gains. For example, 10% more boilerplate in IPO disclosure is associated with a savings of $65,000 in legal fees, on average, controlling for other relevant factors. But the measurable gains are generally outweighed by boilerplate’s information-related costs: greater use of boilerplate is associated with several indicia of information asymmetry that see issuing firms give up as much as $5 to $6 million in the market on average for each additional 10% of their disclosure that consists of rote recitations. Greater use of generic boilerplate language is also related to greater incidence of securities litigation and is associated with lower readability of already complex registration statements. The evidence points to the conclusion that, whether through its content or its signaling effect, boilerplate disclosure in the aggregate represents greater costs for IPO issuers and does little to advance the goal of better informing the investing public.

In addition to discussing implications for law and policy, this Article addresses a puzzle raised by the data: Why do securities issuers continue to use boilerplate when it has the potential to lose them money, draw litigation, and buck regulatory pressure? Theory developed in legal scholarship provides a number of possible answers. The explanation most consistent with these findings is that boilerplate serves as a substitute for information production, meaning that issuers can obscure sensitive information or shortcut due diligence if they are willing to pay the price for doing so.