The Conflict between Disclosure in Securities Markets and the Firm's Need for Confidentiality : Theoretical Framework and Regulatory Analysis

This paper explores the relationship between disclosure in securities markets and the firm's need for confidentiality. Transparency plays a crucial role for both investor protection and the proper functioning of the stock market. Confidentiality protects the value of information which has been costly produced by the company and preserves private incentives for business and technological innovation. The requirement of too detailed or early disclosure in securities markets, even if aimed at greater investor protection and enhanced market efficiency, would be ultimately detrimental, since it would hinder the firm's competitive capacity and weaken the system of private incentives for innovation. Mandatory disclosure rules in both the U.S. and the EU protect the firm's interest in confidentiality and allow public companies to refrain from – or delay – the release of the most sensitive data. However, when information with competitive value is at the same time also of significance for securities markets, refraining from disclosure would damage the firm's capacity to raise finance and would make the process of resource allocation less efficient. Selective disclosure reconciles investors' demand for information and the firm's need for confidentiality, since it allows market prices to react to the information whilst also bypassing the need for a public release of the relevant contents. Reconciling the tension, in turn, constitutes a desirable outcome: the securities market would be more efficient and raising finance would become less costly, especially for the most “secrecy-sensitive” projects. At the same time, the system of private incentives for innovation would be fully preserved