Should We Regulate Financial Information?
|Abstract:||Regulations that require asset issuers to disclose payoﬀ-relevant information to potential buyers sound like obvious measures to increase investor welfare. But in many cases, such regulations harm investors. In an equilibrium model, asset returns compensate investors for risk. By making payoﬀs less uncertain, disclosure reduces risk and therefore reduces return. As high-risk, high-return investments disappear, investor welfare falls. Of course, information is still valuable to each individual investor. But acquiring information is like a prisoners’ dilemma. Each investor is better oﬀ with the information, but collectively investors are better oﬀ if they remain uninformed. The only cases in which providing information improves investors’ welfare are ones where there would otherwise be severe asymmetric information. Using a model of information markets, the paper explores when such outcomes are likely to arise. When we extend the model so that ﬁnancial markets with information allocate the real capital stock more eﬃciently, these conclusions do not change. Disclosure improves eﬃciency, but more eﬃcient ﬁrms do not have more risk and therefore do not oﬀer investors higher return. Instead, they simply command a higher price, which only beneﬁts the asset issuer. Since the eﬃciency gains are fully internalized by asset issuers, who can choose to disclose without disclosure being mandatory, the eﬃciency argument is not a logical rationale for regulation.|
|Rights:||Copyright Pablo Kurlat and Laura Veldkamp, 2012/|
|Appears in Collections:||Economics Working Papers|
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