Does Stock Exchange Competition Lead to Less Disclosure?

This paper investigates how a profit-maximizing stock exchange sets disclosure requirements when it faces competition for trading volume from other exchanges. While public information improves liquidity on all stock exchanges, it also enhances competition for trading volume. This leads to lower trading fees and thereby raises local trading volume. When stock markets are illiquid, this positive trading volume feedback induces the competing exchange to set high disclosure standards in equilibrium, despite free-riding on information by other exchanges. When instead stock exchanges are highly liquid, trading fees decrease sharply so as to induce low disclosure standards in equilibrium. The race-to-the-bottom in disclosure standards is socially inefficient, yielding implications for regulation. The model also produces predictions about the relationship between disclosure standards and stock exchange competition.