Steven Davidoff and Claire Hill have posted “The Limits of Disclosure” on SSRN (here). The abstract concludes that “underlying the rationale for disclosure are common sense views about how people make decisions — views that turn out to be importantly incomplete.... Disclosure’s limits reveal yet again the need for a nuanced view of human nature that can better inform policy decisions.”
Davidoff has also posted an accompanying piece on DealBook: “Reading the Fine Print in Abacus and Other Soured Deals.” After describing a fascinating series of examples that seriously call into question the ability of disclosure to carry the weight our regulatory regime places upon it, Davidoff concludes:
This is a problem. Sophisticated investors are supposed to read the documents. We all know that retail investors don’t often take the time to read disclosure, but the securities laws are based on the idea that information is filtered into the markets through disclosure to sophisticated investors who then set the real price of the security.
This is a form of the efficient market hypothesis. If sophisticated investors can’t be bothered to read the documents and act on them, then we have a real gap in the entire disclosure regime and asset pricing generally.
Unfortunately, this is what the evidence from the C.D.O. market before the financial crisis shows. And because of this, the idea that requiring still more, better or clearer disclosure is likely to be unfruitful in many cases.
So perhaps it won’t be such a bad thing after all if the Supreme Court eventually guts our securities law disclosure regime in the name of the First Amendment.