On the desirability of excessively intervening boards

Notwithstanding the extensive regulation of disclosures by the SEC and accounting standards setters, there remain ambiguities as to what information managers of public firms are obliged to disclose under U.S. securities laws. For example, Langevoort [1999] asserts that "...neither Congress nor the SEC has ever been willing to try to articulate clearly an obligation on the part of corporate managers to divulge important information as it becomes material." As another example, referring to Securities and Exchange Act of 1934 and Rule 10(b)- 5, Coulom [1980] writes: "Neither the statute nor the rule, however, expressly creates liability for mere nondisclosure of material nonpublic information." Related, it is generally acknowledged that Rule 10b-5 does "not create an affirmative duty to update any and all material information. Disclosure is required under these provisions only when necessary "to make... statements made, in light of the circumstances under which they were made, not misleading."" What this rule does is make a manager's disclosure obligations contingent on what other disclosures the manager makes. Related, while it is generally acknowledged that issuing a half-truth, i.e., a statement that has elements of the truth but that is misleading based on other information the issuing manager has in her possession, is illegal under securities laws, that fact is often not decisive in determining a manager's disclosure obligations, since it is not always clear what qualifies as a half-truth. In this paper, we have two objectives. First, we study a static model of voluntary disclosure to try to better understand the economic effects of alternative specifications of a manager's disclosure obligations and specifically, the consequences of alternative definitions of a half-truth. Second, we extend the static model to a dynamic model to try to understand the consequences of imposing, or not imposing, a "duty to update" previously disclosed information. We describe the static model first. In that model, the manager of an asset sometimes privately receives information about the value of the asset, and at other times the manager receives no such information. The information the manager receives - all at once - may be any one of: nothing, one unbiased but imprecise estimate of the asset's value, or two unbiased estimates of the asset's value, one of which is the imprecise estimate and the other of which is a more precise estimate. We assume the manager receives the more precise estimate only if she also receives the less precise estimate. The goal of the manager is taken to be the conventional one of maximizing investors'/buyers' perceptions of the expected value of the asset. We presume that, regardless of what information the manager receives, it is legal for the manager to make no disclosures of that information, whereas it is illegal to disclose half-truths. We study two disclosure regimes, one of which defines half-truths expansively, by forbidding the manager from disclosing the lower precision estimate when the manager is also in possession of the higher precision estimate. The other disclosure regime defines half-truths narrowly, and allows the manager to disclose any unbiased estimate of the asset's value - and in particular allows the manager to disclose just the low precision estimate when the manager also possesses the higher precision estimate.