CORPORATE DISCLOSURE THROUGH THE
STOCK EXCHANGES
James E. Davis
April 24, 1999
In the ongoing debate over the regulation of securities, there are recurring historical claims regarding the activities of the stock exchanges prior to 1933. The participants in this debate can be roughly divided into two groups. The first group, consisting of Paul Mahoney, Roberta Romano, and George Benston, argues that the idea that there was substantial divergence between investor welfare and the behavior of exchanges and their members is unsubstantiated. Joel Seligman and Merritt Fox present the opposite view, arguing that the stock exchanges were inadequate regulators of securities prior to 1934.
Paul Mahoney articulates four central factual claims, which he asserts have survived largely unchanged since they were first articulated in the 1930s.(1) The first of those factual claims evaluated by Mahoney, and the subject of this paper, is that disclosure practices of listed companies were deficient, implying that exchanges lacked either the will or the means to encourage adequate disclosure.(2) Mahoney considers only the practices of the New York Stock Exchange in his evaluation of the exchanges as regulators.(3) He points out that by 1934 the New York Stock Exchange had for many years required listed companies to provide stockholders with balance sheets and income statements prior to annual meetings.(4) He states, based almost entirely on the studies of George Benston, that the evidence does not support the claim that these requirements were ignored.(5) Furthermore, he suggests there was a trend of progress in the promulgation and refinement of New York Stock Exchange rules.(6)
Roberta Romano recently expressed a similar critical history of the role of the stock exchanges prior to 1933.(7) She asserts that, "in the 1930s, public corporations voluntarily disclosed financial statements, typically under a stock exchange listing requirement, that contained substantially all of the information subsequently required under the federal laws."(8) She rests this assertion almost entirely on the Benston studies.(9)
George Benston, in discussing the rationale underlying the Securities Act of 1934, makes various historical assertions.(10) Benston states that before 1934 corporations whose stock was listed on the New York Stock Exchange, New York Curb Exchange, Chicago Stock Exchange and other regional exchanges had to submit balance sheets and income statements to the exchange.(11) He also asserts that all corporations with stock listed on the New York Stock Exchange in 1933 were audited by certified public accountants, all listed the current assets and liabilities in their balance sheets, and a substantial percentage provided other information such as sales, cost of goods sold and depreciation expense.(12)
The factual claims made by Benston, which have be reiterated by both Mahoney and Romano, have been strongly criticized by Merritt Fox in his contribution to the ongoing debate.(13) Fox asserts that Benston's method of researching what the exchange required in the 1920s and early 1930s was to make inquires of them.(14) Fox reports that there were, in fact, no rules requiring listed companies to send annual reports to stockholders in advance of annual meetings.(15) He notes that listed corporations were bound only by their agreements with the exchange and that certain important information was not required under all of the listing agreements.(16)
Joel Seligman, the author of the seminal history of the Federal securities acts(17), is the most prolific contributor in this debate. Seligman strongly criticizes the Benston studies and he presents evidence of the limited corporate disclosures through the stock exchanges prior to 1934.(18) He points to the inability of the New York Stock Exchange to promulgate and enforce effective disclosure rules and to the availability of unlisted trading without any disclosures.(19) Seligman also argues that neither state laws nor stock exchanges could ensure the optimal level of corporate disclosures.(20)
The goal of this paper is to report the information the stock exchanges required corporations to disclose and to evaluate the value of that information to the public investor. This historical analysis reveals that the claims made by all of the recent authors are, to varying degrees, overstated. The thirty-four exchanges in operations at the end of the 1920s each had their own system for listing securities and requiring corporate disclosures. There were well established rules on the New York Stock Exchange in the 1930s that approached the requirements of the 1934 Securities Exchange Act. However, the other exchanges were generally more lax in their requirements and the enforcement of the standards on all of the exchanges was questionable. Moreover, unlisted trading was an available means to avoid the requirements; however, the unlisted trading that actually occurred indicates that disclosures were still made by many of the corporations. Finally, the information that was disclosed by the corporations prior to 1934 had limited value to the public investor due in large part to the lack of accounting standards.
1. 1 See Paul G. Mahoney, The Exchange as Regulator, 83 Virginia Law Review 1453, 1464-65 (1997). 2 See id. at 1464. 3 See id. at 1465-1470. 4 See id. at 1466. 5 See id. 6 See id. at 1469-70. 7See Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 Yale L. J. 2359, 2373 (1998). 8 See id. 9 See id. 10 See George J. Benston, Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934, 63 American Econ. Rev. 132 (1973). 11 See id. at 133; George J. Benston, An Appraisal of the Costs and Benefits of Government-Required Disclosure: SEC and FTC Requirements, 41 J. Law and Contemporary Problems 30, 33 (1977) 12 See id. 13 See Merritt B. Fox, Retaining Mandatory Securities Disclosure: Why Issuer Choice is Not Investor Empowerment 33-36 (1999) (unpublished manuscript on file with Harvard Law School). 14 See id. at 33-34. 15 See id. 16 See id. at 34-35. 17 Joel Seligman, The Transformation of Wall Street (1982). 18 See Joel Seligman, The Historical Need for a Mandatory Corporate Disclosure System, 9 J. Corp. L. 1, 10-34 (1983). 19 See id. at 53-56. 20 See id.