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

The 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 financial markets. 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 when 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. EU mandatory disclosure rules protect the firm’s interest in confidentiality and allow public companies to refrain from – or delay – the release of the most sensitive data. The scope of these safe harbours, however, is narrow and always at risk of excessive restriction by the powers of regulatory agencies. Furthermore, when information with competitive value is concurrently significant for investors, refraining from disclosure – no matter if allowed or not by the law – hampers the firm’s capacity to raise finance and makes 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 public release of the relevant contents. Reconciling the tension, in turn, constitutes a desirable outcome: the securities market will be more efficient and raising finance will become less costly, especially for the most ‘secrecy sensitive’ projects. At the same time, the system of private incentives for innovation will be fully preserved.