You’ve argued that the Enron bankruptcy and similar cases stemmed in part from financial analysts’ failure to trudge through the mountains of disclosure these companies put out. Have we made progress since Enron?

Oh, massive amounts! There was a tremendous amount of confidence, trust, and reliance placed on what are known as sell-side analysts, and they proved to be pretty unreliable. Now, buy-side analysis has expanded. People who are analyzing securities for hedge funds and private equity investors are playing a bigger role.

Why do you object to the idea of requiring more disclosure?

'The goal of securities regulation ought to be to minimize the costs of capital formation for business.'

Two reasons: First, it doesn’t make economic sense. We see lots of companies going public in London and Hong Kong, where there is less disclosure. Second, even if disclosure were the only thing we cared about, we would still have the problem that a lot of information gets lost in the noise. It’s not clear that we want to maximize quantity at the expense of quality. We ought to allow markets to work—firms that don’t make adequate disclosures will pay for that in the form of higher capital costs.

There would be disclosure even without a government mandate—but what the mandate does is actually get in the way of companies making the optimal amount, and the optimal kind, of disclosure to their investors. The problem today is that innovators really do get punished by regulators who want to see things in the old format and who are quite risk averse with respect to that kind of change.

We should have vigorous enforcement of antifraud rules, but we don’t need to mandate disclosure. This notion that transparency is an unmitigated good—what is transparency to some people is theft of intellectual property to others. Transparency gets touted at the expense of property rights, and information, and entrepreneurship.

Shouldn’t regulators try to minimize fraud?

The goal of securities regulation ought to be to minimize the costs of capital formation for business. I certainly don’t believe in fraud, but I do believe that the right amount of fraud isn’t zero. At some point, the cost of more regulation is higher for investors than the amount of fraud the added regulation stamps out. The way to get the efficient amount of disclosure is to focus on what capital costs are for companies.