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Regulatory Certification, Risk Factor Disclosure, and Investor Behavior

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  • Ruben Cox
  • Peter de Goeij

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.

Suggested Citation

  • Ruben Cox & Peter de Goeij, 2020. "Regulatory Certification, Risk Factor Disclosure, and Investor Behavior," Review of Finance, European Finance Association, vol. 24(5), pages 1079-1106.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:5:p:1079-1106.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa003
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    More about this item

    Keywords

    Salience; Investment behavior; Advertising; Statutory disclosure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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