An Empirical Study of Securities Disclosure Practices

Abstract

Using a dataset of sovereign bond offering documents and underlying bond contracts for ten sovereign issuers from 1985 to 2005, we examine the securities disclosure practices of issuers and attorneys. The sovereign bond market is comprised of sophisticated issuers with highly paid attorney law firms. If anyone complies fully with federal securities disclosure requirements, we expect sovereign issuers and their attorneys to do so. On the other hand, network effects that determine what information issuers choose to disclose as well as the high cost of determining what information is required for disclosure may lead issuers to fail to meet their disclosure duties. We provide evidence that sovereign issuers in fact may not fully meet their disclosure duties in one context. Where shocks occur to how courts interpret language in existing boilerplate bond contracts, leading to material and idiosyncratic changes in the underlying allocation of substantive rights for the different issuers, we find zero disclosure to investors. Conversely, we find that where there is less of a legal requirement for disclosure, such as when the entire market shifts publicly to using explicit collective action clauses in the bond contracts, there is a high level of disclosure. Over time, long after such terms have become the market standard and thus part of the total mix of information, this heightened level of disclosure continues. In sum, we find heightened disclosure in the place where the legal obligations (and investor need) for disclosure are less significant and no disclosure in the place where legal obligations (and investor need) for disclosure are more significant.