Should we regulate financial information?

Regulations that require asset issuers to disclose payoff-relevant information to potential buyers are often called “investor protection.” But even when they improve real economic efficiency, such regulations may still harm investors. By making payoffs less uncertain, information reduces risk and therefore reduces return. Similarly, real efficiency gains benefit only asset issuers, who can always choose to disclose. Providing information improves investors' welfare only when 1) issuers strategically manipulate the asset supply to obfuscate information, or 2) the information induces firms to take on riskier investments. Using a portfolio choice model with information markets, the paper explores which types of assets might warrant investor protection.