Disclosure

What is Disclosure?

Disclosure, in financial terms, basically refers to the action of making all relevant information about a business available to the public in a timely manner.

What Does “Relevant Information” Mean?

Relevant information about a business refers to any and every piece of information, including facts, figures, dates, procedures, innovations, and so on, that can potentially influence an investor’s decision.

Any and every piece of information includes all relevant data, whether advantageous or disadvantageous, positive or negative, fortunate or unfortunate, that could affect the business and, in turn, its investors’ decisions.

How Do Disclosures Work?

In the finance and investment world, disclosures are required to be issued by businesses and corporations, disclosing all relevant information that can potentially influence an investor’s decision. It helps investors make informed decisions and choose stocks or bonds that may suit their investment needs and investment portfolio.

Such information disclosures are issued via a disclosure statement, containing all relevant information about the corporation, positive or negative. The disclosures are footnotes at the end of a research report, which provides vital information that one may want to consider while making investment decisions.

Investment research analysts and strategists also issue disclosure statements in research reports they publish.

Why are Disclosures Important?

The importance of full disclosure in the corporate and financial world is essential. It is because:

1. Ensures transparency

Increased transparency in the corporations’ operations and management makes it easier for investors to make informed decisions. It also cuts down on the possibility of manipulation or misuse of investors’ funds.

2. Avoids financial and economic crises

Severe financial and economic crises can be avoided with increased transparency. The 2008 Global Financial Crisis is an excellent example of a financial/economic crisis that was largely, if not entirely, the product of the lack of transparency and accountability in the market. It led to the mishandling of investors’ funds by corporations and financial organizations.

3. Eliminates insider trading and window dressing

Full disclosure prevents agents with “inside information” in the market from misusing it for personal gain and profit. It also prevents the chance of window dressing and account manipulation, thereby further increasing transparency in the market.

4. Allows investors to make informed decisions

Full disclosure of relevant information by businesses helps investors make informed decisions. It decreases the sentiment of mistrust and speculation, and increases investor confidence as they feel fully prepared to make informed investment decisions with transparency in information readily available.

5. Reduces uncertainty in the market

Full disclosure also reduces uncertainty to a great extent in the market. Uncertainty is one of the most prominent reasons for market volatility. When businesses in the market provide full disclosure, there is an increased level of overall certainty, which in turn decreases volatility levels and brings stability to the market, to some extent.

Limitations with Disclosures

There are some limitations associated with company disclosures. One of the limitations relates to financial jargon.

Disclosures typically contain verbose information full of financial and legal jargon, which investors often find difficult to read. The language used is complex and difficult to decipher, making it challenging for investors outside the field to make informed investment decisions.

Regulation

Regulatory standards require companies to disclose their financing activities that may not be immediately visible to investors.

The disclosure clause is strictly regulated by the Securities and Exchange regulatory bodies of each country for all businesses listed on the respective national stock exchanges.

For example, in the U.K., the Financial Conduct Authority (FCA) oversees financial disclosure regulation. The FCA’s counterpart in the U.S. is the Securities and Exchange Commission (SEC). In India, it is overseen by the Securities and Exchange Board of India (SEBI), and so on.

Additional Resouces

CFI offers the Financial Modeling & Valuation Analyst (FMVA®) certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

• Earnings Report
• Source Documents
• US EDGAR
• Types of SEC Filings
• See all Accounting resources