The obligation on issuers to disclose inside information 'as soon as possible' is one of the cornerstones of EU securities market regulation. In my paper I explore the EU’s approach to regulating inside information, both in relation to disclosure obligations placed on issuers and the ban on insider dealing, and compare this approach with that adopted elsewhere, particularly in the US.
The EU’s regime of continuous disclosure of inside information is in contrast to the approach in the US. There are some potentially significant advantages to the EU approach. In particular, if it is correct that the markets in the EU operate in accordance with the semi-strong form of the efficient capital market hypothesis, then in theory the more information that is disclosed to the market the better, since that will enable to price of the securities to move closer to the underlying value of the assets, providing investors with protection when they trade in the securities at the market price. The use of mandatory disclosure also comes with costs, however.
I consider five potential problems with the EU approach to disclosure of inside information. The first two may be regarded as principally concerns for the recipients of the information, namely (1) that the information provided may be too technical, too voluminous or otherwise less beneficial for investors than intended; and (2) the EU approach may interfere with the incentives of sophisticated investors, particularly analysts, to gather and utilise information about an issuer. The remaining problems raise concerns for issuers, namely (3) that the requirement to disclose information as soon as possible may damage issuers’ ability to conduct their business, unless they are able to delay disclosure; (4) the cost of disclosure may cause problems for certain issuers, particularly SMEs, who may be excluded from the capital markets as a result of the cost of mandated disclosure; and (5) the mandatory disclosure of inside information may bring with it an enhanced litigation risk for issuers.
The EU regulation of insider dealing creates a close link between the disclosure of inside information and the prohibition on insider dealing. This approach flows from the market-focused justification for regulating insider dealing that is adopted in the EU, which stands in contrast to the relationship-based justification that exists in the US. The EU approach again has some significant benefits, which I explore in this paper. In particular, a potential cost of banning insider trading is the loss of a possible channel for revelation of non-public information, as other investors ‘decode’ price movements triggered by insiders’ trades. Mandating disclosure of material changes on an ongoing basis ensures that information is transmitted to the market in a timely manner and seeks to reduces this downside. The EU’s continuous disclosure regime can therefore be seen as a clear complement to the decision to ban insider dealing in order to improve market efficiency and protect investors. However, the EU approach of putting insider dealing prohibitions and inside information disclosure obligations into one package also creates potential difficulties, particularly regarding the use of the same definition of inside information for disclosure regulation and the prohibition on insider trading. For example, conduct regulation would suggest that as broad a concept of inside information as possible should be adopted, with little or no opportunity for companies to delay disclosure, since this will maximise the amount of publicly available information and reduce the amount of inside information to the greatest extent possible, thereby minimising the abusive behaviour which undermines market efficiency. However, there can be potential damage to market efficiency where an overly wide disclosure obligation is adopted which prevents issuers being able to protect highly sensitive disclosures and also where torrents of potentially unreliable disclosures operate to feed market volatility.
The EU regime of regulating inside information has significant benefits attached to it, but these benefits have to be weighed against the costs to issuers and investors that this regime can bring, as this paper explores. These concerns need to be understood and managed to ensure that the benefits of the EU regime are not undermined.
Jennifer Payne is the Professor of Corporate Finance Law at the University of Oxford.