Disclosure of financially material information is essential for the protection of investors against fraud and for the efficient functioning of financial markets. It is widely accepted as a fundamental principle of capital market governance that investors must have access to all relevant information in order to make rational decisions about buying, selling, or holding securities. Incomplete or asymmetric access to material information can easily lead to the mis-pricing of securities in financial markets. Moreover, lack of disclosure can conceal financial manipulation and misconduct.
The idea that capital markets accurately incorporate all relevant publicly available information has become enshrined as the “efficient markets” theory, with wide and influential support (Fama 1970). Its basic justification lies in the demonstrated difficulty investors have in consistently achieving abnormally high returns through any trading strategy. The opposite position, that capital markets will not accurately incorporate information that is not publicly available, is central to the disclosure requirements embedded in securities laws in the United States, Canada, and Mexico. Information disclosure is central to the smooth operation of the capital markets.
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