Transparency and Information Asymmetry in Financial Markets

Abstract

The paper deals with the application of aspects of behavioral finance in the context of investor protection reflected in EU financial regulation which puts an emphasis on disclosure requirements. Traditionally, financial regulatory frameworks maintain a status que assumption of “rational investors” contained within neoclassical economic theory, however reoccurring financial incidents have exposed a critical flaw in this understanding, consequently requiring a further examination of behavioral aspects within the context of financial regulation. It remains ambiguous how regulators may best use findings from behavioral finance to address flaws in their investor protection tools. Furthermore, neither expanding disclosure obligations nor enforcing a tougher paternalistic approach may suffice in their intent.