N°23-93: Textual Disclosure in Prospectuses and Investors' Security Pricing

We explore the impact of textual disclosures’ quality and quantity, measured as the share of boilerplate language, the linguistic complexity, and the disclosure length, on investors’ security pricing at issuance. Exploiting an extensive data set covering over 1,000 issuance prospectuses of ABS transactions involving almost 40 million loans, we show that the prospectuses’ quality and quantity substantially affect investors’ pricing beyond all observable risk factors. Investors demand an economically significant higher yield spread if the share of boilerplate language decreases or if prospectuses are lengthy. Hence, more content, in relative or absolute terms, scares investors. To explain these surprising findings, we investigate the importance of three possible mechanisms: presumed default risk, level of information asymmetry, and visualizations supplementing the prospectus. We also document that a lower prospectuses’ quality and a higher quantity weaken investors’ risk assessment, decreasing the economic efficiency in the bond market. Recent EU regulations aiming at addressing these problems have homogenized the quality and quantity of textual disclosure in ABS prospectuses. Our results have important implications for market participants and regulators alike, placing the quality and quantity of textual disclosure in prospectuses high on their agenda.