In my article Mandatory Disclosure: A Behavioral Analysis, I argued that one problem with the SEC's rules requiring disclosure from corporations is that managers likely will make better decisions than regulators about what needs to be disclosed:
[Mandatory disclosure] functions in ways not unlike price controls. A regulatory regime is unlikely to peg prices at the equilibrium point at which marginal cost and marginal benefit are equal. As with any legal rule, the mandatory disclosure regime thus is likely to be under- and/or over-inclusive. Under-inclusive disclosure rules harm investors by denying them information they need. Over-inclusive rules harm investors by requiring the firm to spend money on unnecessary disclosures, which essentially comes out of the investors’ pockets. Investors presumably do not want management to engage in disclosure that produces diminishing returns; i.e., investors will not want management to spend a dollar on disclosure unless that expenditure produces at least a dollar’s worth of benefit to the shareholders. Under a regime of voluntary disclosure, management has an incentive to provide disclosure until it achieves that equilibrium. Because management’s wealth is closely tied to the firm’s financial well-being, it has an incentive to achieve an efficient trade-off between lowering the cost of capital and spending money on disclosure. The government has no comparable incentive. …
As a practical matter, legislators and regulators necessarily have less information about the needs of a particular firm than do that firm’s managers and directors. A fortiori, legislatures will make poorer decisions than the firm’s directors.
My thanks to an alert reader for sending me a real world example that I think proves my point (from USA Today):
The national stockpile of vaccines for children, planned as a cushion against shortages or emergencies, is seriously understocked, health officials say.
The problem isn't money. Funding to buy a six-month supply of recommended childhood shots from vaccine makers is available through the Vaccines for Children Program, which has allotted $172 million for the purpose. The glitch, says Stephen Cochi, acting director of the Centers for Disease Control and Prevention's Immunization Program, is a Securities and Exchange Commission accounting regulation that bars vaccine makers from claiming sales to the stockpile program as revenue until they're delivered to the customer — in this case, the CDC. ...
Under SEC rules, companies can't record sales as revenue while the vaccine remains in the factory. The rules do allow for exceptions, but the vaccine stockpile doesn't meet one of the criteria. The "unintended consequence," Cochi says, is that three of the four vaccine makers have pulled out of the program, leaving only Merck.
Ian Spatz, Merck's vice president for public policy, says the company is sticking with the program, but it would like to see the regulation change because it could discourage drug companies from participating. "Imagine, for all the products Merck sold, if we couldn't record them as revenue," he says. "Our shareholders would not be pleased."
No [expletive deleted]. Is it me or this just nuts? Companies have spent money on raw materials, labor, and capital equipment to make vaccines. The Government has paid the manufacturers for the drugs. Yet, under the SEC rules the manufacturer can't recognize those payments as revenue until the drugs are actually removed from the factory for use. Meanwhile, so as to reduce the risk that the perishable vaccines will be damaged or spoiled, the Government requires the company to keep the vaccines in the factory until the very last minute before use. According to UPI, this can "mean a delay of up to a year in recognizing revenue from the contracts, potentially hurting officially reported profits and earnings per share and, by extension, stock prices."
