Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

US corporate disclosure delays

Corporate disclosures rules in the US still permit long delays more appropriate to a bygone age before technology speeded up everything from stock trading to instant messaging. Cohen, Jackson and Mitts wrote a paper earlier this month arguing that substantial insider trading occurs during the four business day window available to companies to disclose material events. The paper studied over forty thousand trades by insiders that occurred on or after the event date and before the filing date; the analysis demonstrates that these trades (which may be quite legal) were highly profitable.

Cohen, Jackson and Mitts also document that companies do usually disclose information much earlier than the legal deadline: about half of the disclosures are made on the same day; and large firms are even more prompt in their filing. But nearly 15% of all filings use the full four day delay that is available. In the early 2000s, after the Enron scandal, the US SEC tried to reduce the window to two days, but gave up in the face of intense opposition. I think the SEC should require each company to monitor the median delay between the event and the filing, and provide an explanation if this median delay exceeds one day. Since there are on average about four filings per company per year, it should be feasible to monitor the timeliness over a rolling three year period.

Another troubling thing about the US system is the use of press releases as the primary means of disclosure. Last month, the SEC filed a complaint against a group of traders and hackers who stole corporate press releases from the web site of the newswire agencies before their public release. What I found most disturbing about this case was that the SEC went out of its way to emphasize that the newswire agencies were not at fault; in fact, the SEC redacted the names of the agencies (though it was not at all hard for the media to identify them). Companies disclose material events to a newswire several hours before the scheduled time of public release of this information by the newswire; the newswire agencies are not regulated by the SEC; they are not required to encrypt market sensitive data during this interregnum; there are no standards on the computer security measures that the newswires are required to take during this period; a group of relatively unsophisticated hackers had no difficulty hacking the newswire websites repeatedly over a period of five years. And the SEC thinks that no changes are required in this anachronistic system.

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