Mandatory Disclosure, Asymmetric Information and Liquidity: The Impact of the 1934 Act

The Securities Exchange Act of 1934 was the central regulatory event of the modern financial era. The Act required firms listed on U.S. exchanges to provide detailed financial disclosure and provided means for private investors and public agencies to enforce these new disclosure duties. We ask whether the Act was an improvement on the prior legal regime, where disclosure was left to private contract and state legal rules. We also examine whether mandatory disclosure provided investors with useful information. We use differences in firms’ pre-Act disclosure policies to study the Act’s effects on bidask spreads and other measures of the information environment. We are unable to identify specific newly required disclosures that reduce information asymmetries or improve liquidity. There is evidence however that the Act’s new enforcement mechanisms allowed firms to credibly commit to making their disclosures accurate.