Hidden Mandatory Disclosure

For over three decades, the electronic dissemination of corporate filings via the SEC’s EDGAR system has been viewed as the cornerstone of modern US capital markets. The implicit assumption in securities regulation is straightforward: if a document is filed with the Commission, it is public, and prices will adjust accordingly.

However, my paper, Hidden Mandatory Disclosure, documents a significant structural failure in this assumption. I find that the SEC’s long-standing policy of accepting certain filings on paper—rather than requiring digital submission to EDGAR—created a market environment where ‘mandatory disclosure’ did not equate to ‘public knowledge’. Specifically, I show that a lack of awareness about the existence of these filings, even among the SEC’s own divisions, prevented this information from being incorporated into stock prices and allowed corporate insiders to engage in opportunistic trading without scrutiny.

The ‘Hidden’ Filings and the COVID-19 Natural Experiment

The study focuses on Form 144, a mandatory filing for shareholders intending to sell significant amounts of restricted stock. While Section 16 insiders (officers and directors) must file Form 4 electronically, a distinct group of shareholders—including affiliates and pre-IPO investors—were permitted to file Form 144 exclusively on paper. These paper filings were housed in the physical SEC Reading Room in Washington, DC, where they were digitized by private vendors and sold to subscribers.

In theory, this information was public. In practice, it was invisible.

In April 2020, in response to the COVID-19 pandemic, the SEC closed the Reading Room and began posting scanned images of these paper filings on its public website. This policy shift created a unique natural experiment, allowing us to isolate the effects of ‘awareness costs’—the friction that prevents investors from knowing information exists—from ‘acquisition costs’ (the price of obtaining data).

The Cost of Unawareness

Under the efficient market hypothesis, the mode of disclosure (paper vs digital) should not matter if sophisticated arbitrageurs can access the data. The subscription cost to access paper filings (roughly $30,000 per year) is negligible for an institutional investor—less than the cost of a single Bloomberg terminal.

Yet, the empirical data reveal that sophisticated capital simply was not looking. Prior to the SEC’s shift to online posting, I find no instantaneous or delayed market reaction to paper Form 144 filings. The market was effectively silent. However, immediately after the SEC began posting these scans online, the market reaction was pronounced, with trading volume spiking by roughly 10% on the days following a filing.

This confirms that the information in Form 144 was value-relevant but was being ignored. The friction was not the cost of the data, but the market’s lack of awareness that the data was worth monitoring.

Opportunism in the Dark

The consequences of this ‘awareness gap’ extended beyond inefficient pricing; it created a shield for opportunistic behavior. The paper compares a ‘control group’ of insiders (whose trades were already digital via Form 4) against a ‘treatment group’ (insiders who only filed paper Form 144s).

The results are stark. Prior to the digital shift, the treatment group’s sales were highly opportunistic, avoiding losses of approximately 12.25% in the year following their trades. This suggests these insiders were trading on private information, confident that their disclosures were effectively buried in the Reading Room.

Once the filings moved online in April 2020, this advantage evaporated. The loss avoidance for the treatment group plummeted to zero, matching the control group. The paper estimates that the lack of electronic dissemination allowed these insiders to avoid approximately $3.8 billion in losses between 2016 and 2019—wealth effectively transferred from uninformed investors to insiders.

Implications for Securities Regulation

Perhaps most strikingly, the ‘awareness gap’ extended to the regulator itself. Discussions with SEC officials revealed that many were unaware these paper filings existed or were not monitoring them. It was only after the filings became easily accessible online that the SEC brought its first insider trading case based on Form 144 data.

These findings offer strong empirical support for the Commission’s recent moves to modernize filing requirements, such as the adoption of Updating EDGAR Filing Requirements (Release 33-11070). The data demonstrate that ‘access’ is a necessary but insufficient condition for market transparency. For mandatory disclosure to function as a monitoring mechanism, the friction of awareness must be minimized. When disclosures are legally available but practically hidden, the playing field is not level, and the fundamental goals of the Securities Act are compromised.

The author’s paper is available here.

Bradford Levy is an Assistant Professor of Accounting and Applied AI at the University of Chicago Booth School of Business.