24.4 Part III — Disclosure requirements in law and economics perspective

In the operation of the securities markets and the pricing on these markets, the ECMH can be seen as the connection between information and pricing. Based on the ECMH it is assumed that, on an efficiently functioning securities market, all of the available information has been incorporated into the market prices. The effectiveness of the ECMH has, with good reason, been doubted in the past few decades. This leads to the conclusion that general conclusions about the supposed effectiveness of the ECMH should be drawn with due care in legislation and the legai system.

Several justifications have been given for imposing disclosure requirements on listed companies. It has been argued that information has the character of `public property', which is characterized by the fact that it is under-produced. In addition, inadequate provision of information has adverse external effects, which is given as a second justification for imposing disclosure requirements. Both justifications can, however, also be questioned. A third justification is that the existence of agency problems within the listed companies precludes the disclosure of the optimal amount of information. This is a theoretical justification for imposing disclosure requirements. Empirical studies should subsequently show whether the present form of the disclosure requirements is optimal. Coming up with a thought process for this does not appear to be all that simple, however.

The fact that imposing disclosure requirements for listed companies results in an improved operation of the securities market can be assumed for a number of reasons. It can be inferred from law and economics studies that the imposing of disclosure requirements has increased the accuracy of market prices. Whether the revenue from this increased accuracy of the market prices outweighs the costs of these requirements is not yet an established fact. The increased accuracy of the market prices of securities means that the securities market is also better able to enforce the `disciplinary effect'. Finally, imposing disclosure requirements also contributes to increasing the confidence of investors in the adequate operation of the securities market. Economie theorizing on this point is still not adequate enough to assess whether the revenue from the disclosure requirements outweighs the costs. Disclosure requirements for listed companies whose aim is mainly or solely to restore or increase this confidence must for that reason be critically examined at regular intervals.

The fact that imposing disclosure requirements for listed companies contributes to countering agency problems within listed companies can also be assumed. It can be inferred from law and economics studies that imposing disclosure requirements can contribute positively to reducing direct monitoring costs by decreasing the cost of capital of listed companies. When interpreting these results, however, they should not be taken at face value. Nor is it clear whether the present form of the disclosure requirements achieves this aim in a cost-effective manner. Whether this is the case will depend to a significant degree on the actual shareholder and financing structure of the listed company. In addition to reducing the direct monitoring costs, there are good reasons for assuming that the disclosure requirements also contribute indirectly to reducing the agency costs within listed companies — through the facilitating role of information when exercising shareholders' rights. Finally, imposing disclosure requirements on listed companies can result in reduced agency costs due to the increased confidence in the principal-agent relationship. It is not easy to establish in this respect either what the optimal scope of the disclosure requirements should be.

In the final conclusion about the law and economics justifications for imposing disclosure requirements, I have established that, first of all, it is noticeable that law and economics theorizing about the aims of the disclosure requirements as a rule lags behind the actual formation of these requirement. It is also noticeable that the aims and justifications for imposing these requirements cannot always be clearly distinguished from a law and economics perspective either. In addition, it cannot be concluded on the basis of law and economics studies performed to date whether the disclosure requirements for listed companies have been designed in a cost-effective and efficient manner. As there are doubts about the cost-effectiveness and efficiency of the disclosure requirements for listed companies, there is reason to exercise due care when extending these requirements.