Why should disclosure rules subsidize informed traders?

This article justifies the existence of disclosure provisions as part of the securities laws. Securities prices may deviate from the securities' underlying values due to “irrationalities.” Market efficiency (i.e., the accuracy of securities' prices) materializes through the trading of investors who observe and attempt to profit from these inefficiencies. The danger of false prices deters the corrective trading of these “informed traders”. This article argues that disclosure rules provide them with costless information, essentially subsidizing their activity. The cost of this subsidy is borne by the corporation, i.e., all shareholders, of which informed traders are only a fraction. Long-term shareholders would not subsidize efficiency absent disclosure rules because, they do not trade, and they do not reap the benefits of accurate prices. This subsidy fosters short-term uninformed shareholdings and, thus, increases trading volume and capital market liquidity.