Regulatory certification, risk factor disclosure, and investor behavior

Ruben Cox, Peter de Goeij

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This article examines the question: Does regulatory approval of prospectuses act as a “certification” of securities offerings? Rational investors should generally ignore prospectus approval due to its being uninformative regarding either the quality of, or motives for, the underlying offering. Our survey experiment demonstrates that salient references to regulatory oversight in investment advertisements can lead to significant increases in willingness to invest and concomitant decreases in perceived risks. Conversely, salient disclosure of risk factor information increases risk perceptions and reduces the intention to search for additional information. Various robustness tests confirm that investors can perceive regulatory oversight of securities offerings as an endorsement. Our results provide insight regarding the design of the disclosure and the effective regulation of financial marketing.

Original languageEnglish
Pages (from-to)1079-1106
Number of pages28
JournalReview of Finance
Volume24
Issue number5
DOIs
Publication statusPublished - 1 Sept 2020

Bibliographical note

JEL Classification: D91 - Intertemporal Consumer Choice; Life Cycle Models and SavingG11 - Portfolio Choice; Investment DecisionsG18 - Government Policy and RegulationM37 - Advertising
Publisher Copyright:
© The Author(s) 2020. Published by Oxford University Press on behalf of the European Finance Association.

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