Disclosure: Too much of a good thing?

Posted by Marc Hodak on March 23, 2014 under Governance, Invisible trade-offs | Be the First to Comment

Transparency has its benefits.  It enables shareholders to see into the company they own, and thereby judge whether it’s worth owning.  The main mechanism for transparency in the corporate world is company disclosures.  Does that mean that more disclosure is better?  This article suggests otherwise:

In a coming paper in the Journal of Finance, Messrs. Loughran and McDonald suggest that size may be what really matters. They studied 66,707 10-Ks filed for the years 1994 through 2011. Controlling for factors including size and industry—bigger or highly regulated companies naturally file longer 10-Ks—they looked at how well the stock market appeared to read the performance of companies with lengthy filings.

Answer: Not so well. In the weeks after filing, shares of those with longer reports tended to be more volatile than those favoring brevity.

Somewhere along the line, disclosure became synonymous with transparency.  Particularly in eyes of many governance mavens.  Perhaps that’s because, since 1933 at least, the ability to compel disclosure has been the main tool in the federal regulatory tool chest.  When you have a hammer…

I often introduce the Enron case with its 10-K from the year before the firm’s implosion.  It’s difficult to go through that tome, including the volume of data on its infamous Special Purpose Entities, and claim that insufficient disclosure was the culprit.  Their management accurately, if literally, conveyed the complexity of its operations.

This new study begins to explain how disclosure is not the same thing as transparency, and why the “more is better” instinct may be leading us astray.