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1998-06-15 09:07:46


Law Professor Warns of Stock Market Fall Due to Y2K



This testimony before a Senate Banking subcommittee warns of a fall in the stock market due to y2k.

How much equity is at stake? Ten trillion dollars.

I would put it this way: "A trillion here (gone), a trillion there (gone), and pretty soon we're talking about big money."

* * * * * * *

Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Financial Services and Technology

Hearing on Disclosure of Year-2000 Readiness

Prepared Testimony of the Ms. Lynn A. Stout Professor of Law Georgetown University

10:00 a.m., Wednesday, June 10, 1998

Good morning, Mr. Chairman and Distinguished Members of the Subcommittee. My name is Lynn Stout, and I am a Professor of Law at the Georgetown University Law Center, where I teach courses in securities regulation, corporate law, and law and economics. I have been asked to testify today on some of the likely effects on the stock market of corporate nondisclosure of Year 2000 problems.

The American stock market is one of our most critical economic institutions. Most importantly, it has become the repository for a huge portion of our nation's savings. Recent data indicate that Americans have put more of their personal wealth into corporate equities (either by buying stocks directly, or through interests in pension funds and mutual funds that hold stocks) than they have put into any other form of investment, including home ownership. Indeed, the market value of publicly-traded equity in U.S. firms now significantly exceeds ten trillion dollars. . . .

This is the economic context in which we must consider the disclosure issues posed by the Year 2000 problem. Federal securities law imposes on publicly-held corporations the obligation to periodically disclose to investors all information that is "material." According to the U.S. Supreme Court, information is material if there is "a substantial likelihood that a reasonable shareholder would find it important." . . .

Despite these efforts, evidence suggests that some companies still are not disclosing information concerning Year 2000 problems, while others are disclosing only very limited information, or are providing only boilerplate statements that carry little content. This sort of nondisclosure of material information can ultimately have a very detrimental effect on investor confidence in the stock market in general, and on stock prices in particular.

When a company initially fails to disclose foreseeable Year 2000 problems, the stock of that firm is likely to trade at an artificially high price. This is because the firm's investors are accustomed to assuming they are being kept informed of material developments. Thus, they are also likely to assume, absent disclosure of the problem, that their company is not at risk of suffering significant Year 2000 costs. . . .

If a company discloses predictable Year 2000 costs only after-the-fact, however, its stock price is likely to drop further than it would have if the firm's shareholders had been kept informed in a timely fashion. This is because, in addition to learning that their company is not worth as much as they had thought, the firm's investors have also learned something else: they have learned that the federal system of mandatory disclosure is not as reliable as they had believed. The resulting erosion in investor confidence can depress the prices of other companies' stocks as well.

Nondisclosure of foreseeable Year 2000 problems accordingly reduces the long-term value not just of those corporations that fail to make disclosure, but of the U.S. stock market as a whole. The inevitable price declines that must follow companies' disclosure of their Year 2000 problems can be made far worse if we also allow those companies to undermine investors' faith in the mandatory disclosure system by delaying disclosure.


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