Measuring the Effectiveness of the Statutory-Backed Continuous Disclosure Policy - E210
Australia introduced a statutory-backed continuous disclosure policy (CDP) in 1994 to help bolster the Australian Securities Exchange (ASX) in policing its continuous disclosure rules. However, statutory-backed continuous disclosure may be problematic for managers of innovative or high-growth firms. This is because obligatory full disclosure of project details is likely to undermine a firm’s competitive advantage, potentially prompting managers to be less transparent in their approach to disclosure. On the other hand, innovative investments are typically difficult to value, so full and accurate disclosure may increase transparency and consequently support a higher market valuation for a firm.
The project aims to examine:
- The effectiveness of Australia’s CDP over time by investigating its impact on firms’ share price performance following announcements related to new technology and similar research initiatives.
- The quality, frequency, and value of disclosures related to innovation, both before and following the point of implementation.
- Whether enhancements to the original CDP regime have been effective.
The research finds that post the implementation of CDP in 1994, firms exhibit a reduced inclination to disclose information regarding initiatives related to innovation. They nevertheless show a greater willingness to provide disclosure after the adoption in 2003 of stronger non-disclosure legislation. This outcome is consistent with the view that changes in regulation are only likely to be effective if policed effectively through regulatory agencies, with significant penalties for non-compliance.
The study also examines firms’ propensity to provide disclosure by comparing announcements respectively related to innovation spending and capital expenditure. A significant decline in announcements related to innovation spending is evident immediately after the implementation of CDP. This continues even after 2003, when the penalty costs of non-disclosure increased. The findings suggest that the successful use of regulation to persuade firms to provide greater innovation-related disclosure remains challenging. This is consistent with the view that the costs related to a potential loss of competitive advantage due to full disclosure outweigh the penalties for non-disclosure.
Regulation of disclosure has an important role to play in increasing transparency for investors and other stakeholders. Therefore, regulatory bodies need to carefully consider the arguments for having a more open information environment that facilitates knowledge spillovers, but has an associated disincentive to provide innovation-related disclosure.