Current regulations, which require companies that issue stocks and bonds to publicly disclose information to investors, allegedly assist those investors in determining the appropriate price for securities as well as detecting fraud. But mandatory disclosures impose heavy costs on issuers of debt and stock. Do the benefits outweigh the costs?
In the forthcoming issue of Regulation Elisabeth De Fontenay, an associate professor at Duke University Law School, answers that question by examining a natural experiment in corporate debt markets.
Corporate bonds are treated as securities and subject to mandatory information disclosure under SEC regulations. In contrast corporate loans are not subject to SEC disclosure regulations because historically such loans were held to maturity by the issuing bank. But over the last 15 years corporate loans have become functionally equivalent to bonds especially at the “high-risk high-return end of the spectrum.” They are underwritten by many investors and securitized and traded in secondary markets.
If regulation produces net benefits for investors, then they would purchase only corporate bonds rather than syndicated loans. But “the market not subject to mandatory disclosure is not only thriving, it is surging past its regulated counterpart.”
How is this possible? De Fontenay explains that in secondary loan markets, investors obtain all the information they need through contract. And that information is more relevant to investor needs than the information mandated by regulation.