Non-english Mutual Fund Prospectus

Corporate Disclosure Term Paper - A|YAKOVLEV

1. Introduction

The issue of corporate disclosure is a dynamic one. Markets evolve through technology, economic theory, macro economic environment, legislature, and other elements. In fact, markets seen as signifiers of human economic enterprise, are the most dynamic systems observable to man and the pace of globalization has only sped up their progress and made them more volatile. In this system, corporate disclosure plays several major roles. At face value corporate disclosure is an issue of trust and the requirements for it serve the role of market protection. In fact, the original spirit behind the Act of 1934 was to protect the retail investors, the outsiders, by giving them access to insider financial and other material information (Shefrin and Statman, 1993). The laws have been tweaked with time, such as the recommendations of the Brady Commission following the 1987 crash (that echoed 1929), the introduction of Regulation Fair Disclosure (Regulation FD) by the SEC in 2000, and the Sarbanes-Oxley Act of 2002. One can argue though, that the ‘consumer’ protection and market integrity aspects of the requirements are cosmetic to a degree, bubbles haven’t been prevented, retail (unsophisticated) investors, as demonstrated by the events of 2008, are not considerably safer than they were before. The true economic function, and the reason that companies commit to disclosure, is the significant reduction in agency costs (Stulz, 2009). The regulations allow for a more efficient investment of capital for financial institutions, whether through equity purchase and especially through debenture allocation. The standardization of the reports, the presence of an enforcing agency, as well as that of ex ante and ex post controls, create an environment of trust that lowers risk, as well as lowering the need to individually negotiate capital allocation between the players (Leuz, 2010). Corporate disclosure requirements actually protect the sophisticated investor, and the enforcement of these laws gives companies a lower cost of capital. Information generation and acquisition costs are further lowered through the requirement for standardization.

The paper is broken down into three sections. Section 1 discusses the history of corporate disclosure regulation in United States, starting with the Securities Exchange Act of 1934, and the consequent toughening of these requirements by Regulation FD and Sarbanes-Oxley. Section 2 looks at current trends that put mandatory disclosure rules under debate. In particular, the paper looks at the arguments under Portfolio Theory, Efficient Market Hypothesis, and the impacts of High Frequency Trading (HFT). The section also discusses the reverting trend towards financial intermediation, with institutional investors now accounting for 70% of market wealth. Section 3 addresses the impact of Globalization (which allows for ‘regulatory shopping’), the coming international adoption of International Financial Reporting Standards (IFRS), liberalization of financial markets, as well as the results of SEC Rule 12h-6 which allows for the voluntary deregistration (not delistining) by foreign firms on American exchanges.

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