The Struggle between Private and Public: The Case of Stock Exchanges

Abstract

Capital markets are now an essential component of a strong economy. They facilitate the formation and allocation of capital, which is necessary for economic growth (Healy and Palepu 2001). Capital markets function well only if they can trade on information. This information can reach the market as insider information or as disclosure. The use of insider information, knowledge particular to a subset of owners and managers, puts some buyers and sellers at an advantage: informed insiders can exploit knowledge that they only received due to their privileged position in the company at the expense of outside shareholders. Disclosure, the simultaneous release of information to all market participants, forestalls these windfall gains. Making markets thus attractive to outsiders, disclosures, both mandatory and voluntary, play an important role in strengthening stock markets.