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62 U. Chi. L. Rev. 1047 (1995)
Mandatory Disclosure As a Solution to Agency Problems

handle is hein.journals/uclr62 and id is 1051 raw text is: Mandatory Disclosure as a Solution to Agency Problems Paul G. Mahoneyt INTRODUCTION Most sellers of goods or services are not legally compelled to provide particular information about their products to potential buyers; they must merely avoid making false claims. One impor- tant exception relates to securities. Firms that issue securities in the public markets must provide affirmative disclosures about the securities and the issuer. This is true not only in the United States, but in most developed countries. What accounts for the distinction between securities and other products? Surprisingly few attempts have been made to justify the distinction on efficiency grounds. The initial approach of academ- ic economists to the United States securities laws was to marshal empirical evidence that investors were, or were not, better off after the enactment of these laws.' In response to the empirical debate, a small but influential theoretical literature has devel- oped on the efficiency of mandatory disclosure.2 That literature identifies the goal of mandatory disclosure as helping market participants to determine prices for securities that accurately t Assistant Professor of Law, University of Virginia School of Law. I thank Barry Adler, Mike Dooley, Jill Fisch, Reinier Kraakman, Ed Kitch, Julia Mahoney, Eric Orts, Steve Thel, George Triantis, Bill Williams, and workshop participants at the University of Pennsylvania Law School and the University of Toronto Faculty of Law for comments. Andrew Brownstein and Jennifer Mink provided excellent research assistance. ' See George J. Stigler, Public Regulation of the Securities Markets, 37 J Bus 117 (1964) (arguing that returns to investors in new issues were unaffected by securities laws); Irwin Friend and Edward S. Herman, The S.E.C. Through a Glass Darkly, 37 J Bus 382 (1964) (challenging Stigler's analysis and countering that the variance of returns was lower post-1933); George J. Benston, Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934, 63 Am Econ Rev 132 (Pt 1 1973) (evidence suggests that mandatory periodic disclosure does not benefit investors); Irwin Friend and Randolph Westerfield, Required Disclosure and the Stock Market: Comment, 65 Am Econ Rev 467 (Pt 1 1973) (challenging Benston's analysis). The principal works are John C. Coffee, Jr., Market Failure and the Economic Case for a Mandatory Disclosure System, 70 Va L Rev 717 (1984); Frank H. Easterbrook and Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 Va L Rev 669 (1984); and Gregg A. Jarrell, The Economic Effects of Federal Regulation of the Market for New Security Issues, 24 J L & Econ 613 (1981). 1047

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