Behavioral Economics and the Regulation of Public Offerings

71 Pages Posted: 18 Nov 2005

See all articles by Stephen J. Choi

Stephen J. Choi

New York University School of Law

Date Written: November 2005


The SEC adopted new rules in 2005 governing registered public offerings in the United States. Few, if any, of the rules make sense if we start from a presumption that investors are rational and are able to discount properly for any information they receive during the public offering process. In this Article, I examine the new rules and assess the implicit behavioral assumptions about investors contained in the rules. I also provide an assessment of the behavioral biases that may affect regulators at the SEC. Regulator biases may lead the SEC to take an ad hoc evaluative process often ending with a reference to investor confidence in justifying new regulations. As a minimal solution, I propose that the SEC bear the burden of specifying its assumptions behind investor behavior explicitly together with how regulations will benefit investors suffering from such biases (as well as how other investors are affected by the regulations). Taking such an approach will lead to a more consistent approach in how the SEC deals with investor biases and reduce unnecessary regulation (as opposed to the SEC's present ad hoc approach as typified in the public offering rules). To the extent other more public choice factors motivate regulation and references to investor confidence are merely a pretext, my proposal would help bring transparency to these other factors by focusing attention on whether the investor confidence rationale in fact is justified.

Keywords: public offerings, gun-jumping, registration statement, prospectus

JEL Classification: K22, K23

Suggested Citation

Choi, Stephen J., Behavioral Economics and the Regulation of Public Offerings (November 2005). NYU, Law and Economics Research Paper No. 05-31. Available at SSRN: or

Stephen J. Choi (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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