The Hydraulic Theory of Disclosure Regulation and Other Costs of Disclosure
This article argues that mandatory securities disclosure regulation has unanticipated and ill-considered consequences. Disclosure regulation makes some forms of behavior more expensive relative to others. Rational actors will respond by shifting some conduct into comparatively cheaper outlets. And these alternative behaviors may actually be less beneficial than the regulated, deterred behavior. Likewise, required disclosure of corporate information to investors makes shareholder governance less costly and more likely, even where it should be deterred. In essence, disclosure regulation effectively proscribes, it does not prescribe. Thus, depending on the viability of other behaviors, forced disclosure may induce unwanted behavioral responses. The article identifies two broad concepts that encapsulate these dynamics. The first is a “hydraulic theory” of securities disclosure regulation. Under this theory, disclosure regulation triggers behavioral hydraulics which may lead to an undesirable shift in executive behavior, as well as an undesirable shift in the pool of candidates for corporate executive positions. The second is an information cost theory of securities disclosure regulation. Under this theory, mandated disclosure is both unnecessary to market efficiency and affirmatively harmful to firms’ competitive schemes of corporate governance.