Financial disclosure regulation and its critics

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In February 1985, the Subcommittee on Oversight and Investigations of the House Energy and Commerce Committee began a series of hearings that may lead to a proposal to expand the Securities and Exchange Commission's (SEC's) disclosure regulations. This article presents a synthesis of a growing body of literature that questions the need for any such regulation. Three types of critiques are discussed: first, studies that have examined the historical process through which the SEC was formed; second, empirical studies that have analyzed the effects of regulated disclosure on the capital markets; and third, theoretical studies that have questioned the fundamental rationale for financial disclosure regulation. Following these critiques, brief consideration is given to the role of security analysts and to the financial disclosure implications of modern portfolio theory. Finally, two alternatives to conventional financial disclosure regulation are presented. The purpose of this article is to stimulate interest in a critical examination of the SEC's existing disclosure program by providing a basis for discussion and analysis of the issues and the evidence and by presenting some alternatives based on the experiences of other countries. It is directed toward intermediate accounting courses, graduate courses in accounting theory and policy and graduate courses in corporate financial reporting.