A Pragmatic Approach to More Efficient Corporate Disclosure

This paper uses a Pragmatic theory of language (drawn from philosophy and linguistics) to diagnose the causes of excessive financial disclosure and propose a regulatory solution. The diagnosis is that existing disclosure regulations are one sided, effectively encouraging firms to disclose any information that might be relevant, but failing to discourage disclosure of information that adds little to what investors already know. This one-sidedness limits investors' ability to draw inferences that items the firm chooses not to disclose are not newsworthy (an inference Pragmatic theorists call "implicature"). The solution is to encourage or require firms to supplement comprehensive disclosures with an "elevated" disclosure that is brief enough to force firms to be selective in choosing what information to include. Regulations can enhance implicature through rules that prohibit firms from elevating disclosures that are less newsworthy than disclosures that are not elevated.