Corporate disclosure, though frequently valuable, also has serious drawbacks, often leading to adverse unintended consequences that can outweigh its benefits?

November 8, 2013

Against Disclosure


IN the policy world, corporate disclosure is widely seen as an unalloyed good. Publicly traded corporations are under growing pressure to reveal more information about C.E.O. compensation, political spending and even the dangers that climate change poses for the company. Shareholders need such information, advocates say, in order to hold managers accountable and reduce risks to the company and its reputation. Democracy itself, the argument continues, benefits when voters know more about how corporations operate. But a number of recent studies, including some of my own, suggest that this view is shortsighted. Disclosure, though frequently valuable, often leads to adverse unintended consequences that can outweigh its benefits.Groups like the Center for Political Accountability that favor greater disclosure often cite the experience of Target. In 2010, Target, to comply with a disclosure law, made public its contribution to a pro-business group called MN Forward. Gay rights activists then led boycotts and store protests of Target because MN Forward supported the pro-business Minnesota candidate for governor Tom Emmer, who also opposed gay marriage.

While disclosure advocates embrace this episode as the comeuppance of a company that had something to hide, I think a different lesson might be drawn. Target’s political spending was almost certainly, on balance, in line with the interests of the corporation. You can’t pick and choose the positions of your candidate, and Target was contributing to MN Forward, not the candidate directly. But by using information obtained as a result of a disclosure law, activists were able to manufacture a problem for Target that disrupted its operations.

Other sorts of disclosure, like the Securities and Exchange Commission-mandated financial reporting by publicly traded companies, can alter the incentives of corporate managers in counterproductive ways. In a working paper released by the National Bureau of Economic Research in September, the researchers Alex Edmans, Mirko Heinle and Chong Huang used a theoretical model to show that mandated disclosure leads corporate managers to prefer decisions that produce favorable, verifiable information — like taking steps to increase short-term profits — over actions that may be better for the company in the long run but do not produce easily measurable data, like creating an environment that fosters innovation.

You might suspect that the benefits of disclosure far exceed any such costs. But my colleague Saumya Prabhat and I have found empirical evidence to the contrary. In recently conducted research, we studied the consequences of a 2000 law in Britain that required greater disclosure — and even shareholder approval — of corporate political spending. Because some disclosure was required before 2000, we were able to obtain data on which companies were politically active and which were not. Using a statistical method to isolate the effect of the law, we looked at the three years before the law went into effect and the three years afterward, to see how politically active and inactive companies changed.

We found that after the law went into effect, politically active businesses in Britain did not see changes in stock price volatility (a common measure of financial risk) that differed from those of their politically inactive counterparts. Any benefits to shareholders provided by the law were counterbalanced by its costs.

But, you might be thinking, who cares about shareholders? It’s democracy that we should be worried about. Political scientists often argue that the citizenry benefits if it knows, for example, about corporate spending on ballot measures on which it is preparing to vote. (If you are critical of oil companies, and an oil company spends money in favor of an initiative, that may be all you need to know to cast a “no” vote.)

But in an experiment whose results I published in the Election Law Journal, I found that this wasn’t necessarily so. I separated participants into three groups that received differing amounts of information about a hypothetical ballot measure regarding taxation and immigration policy. A control group saw the wording that appeared on the ballot; a second group saw the wording and was also given access to news accounts, advertisements and a voter guide summarizing the pro and con positions; and a third group could view all of this information as well as campaign-finance disclosure data integrated into news stories. The material provided to the second and third groups explicitly mentioned the positions of various interests, including corporations.

All three groups of voters were then asked to identify the positions of the various interests on the ballot measure. (They did not know they would be asked to do this.) Remarkably, participants in the third group who viewed the disclosure-related information did no better than other respondents (controlling for other material participants viewed). In other words, once you account for everything available to voters, campaign-finance disclosure provides very little informational benefit.

For too long, disclosure has been viewed as the policy equivalent of a “free lunch” — all benefit and no cost. Disclosure is not always a bad thing. But it is not always a good thing, either.

David M. Primo is an associate professor of political science and business administration at the University of Rochester.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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