Abstract

http://ssrn.com/abstract=437662
 
 

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Law, Share Price Accuracy and Economic Performance: The New Evidence


Merritt B. Fox


Columbia University - Law School

Art Durnev


University of Iowa - Henry B. Tippie College of Business

Randall Morck


University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER)

Bernard Yin Yeung


National University of Singapore - Business School

August 20, 2003



Abstract:     
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

working papers series


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Date posted: October 8, 2003  

Suggested Citation

Fox, Merritt B. and Durnev, Art and Morck, Randall and Yeung, Bernard Yin, Law, Share Price Accuracy and Economic Performance: The New Evidence (August 20, 2003). Available at SSRN: http://ssrn.com/abstract=437662 or http://dx.doi.org/10.2139/ssrn.437662

Contact Information

Merritt B. Fox
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States
Artyom Durnev (Contact Author)
University of Iowa - Henry B. Tippie College of Business ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
(514) 398-5394 (Phone)
(514) 398-3876 (Fax)
HOME PAGE: http://www.artdurnev.com
Randall K. Morck
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Bernard Yin Yeung
National University of Singapore - Business School ( email )
1 Business Link
Biz 2 Building Level 6
Singapore 117592
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)
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