A behavioural law and economics approach to sustainability information

ABSTRACT

Mandatory disclosure is a traditional tool of corporate governance and securities regulation. The growing field of sustainable finance regulation has taken up the issue of corporate sustainability reporting. With respect to sustainable corporate governance, the shift from a shareholder centric approach to a stakeholder approach is underway. Moreover, behavioural corporate governance focuses on disclosure as a tool to trigger particular reactions in investors and companies. With respect to securities regulation, the efficient capital markets hypothesis has been challenged by behaviourists who have studied deviations from perfectly rational behaviour. Although behavioural findings are not new, lawmakers and courts have continued to rely extensively on disclosure obligations to promote efficient markets. This recurring theme of capital markets law deserves renewed attention given the extent to which the growing area of sustainable finance regulation has laid emphasis on sustainability disclosure. This article seeks to assess the implications of behavioural economics concerning the law and regulation of sustainability information in the capital markets.

A. Introduction

The foundations of securities regulation have been built upon full disclosure based on the premise that ‘sunlight is said to be the best of disinfectants’.¹ Regulators have traditionally used disclosure as a tool for good governance. In this vein, the mandatory disclosure paradigm has become the bedrock of sustainable finance regulation. Most notably, the European Union has adopted far-reaching sustainability reporting obligations. The foundations of capital markets law are however grounded on classical finance theories that oversimplify the complexities of the reality. With respect to corporate governance, the agency problem requires disclosure to reduce information asymmetries between managers and investors. With respect to corporate finance, disclosure obligations seek to promote market efficiency. Enhanced sustainability disclosure is meant to bolster investors' confidence in the integrity of the company's commitment to improving its sustainable practices.

Yet research in behavioural economics has flourished over the last decades. The issue is relevant for corporate and securities laws scholars alike. Although the topic is not new, it is important to discuss the implications of the behavioural findings in the realm of sustainability. This paper addresses to what extent the question of who are the relevant investors has to be revisited in the sustainability age.

First, the field of sustainable corporate governance has reflected the shift from a shareholder centric approach to an approach oriented at a broader array of stakeholders. Behavioural corporate governance focuses on disclosure as a tool to trigger particular reactions in investors and companies.

Second, the field of behavioural corporate finance gained prominence in the light of modern decision theory. Disclosure impacts behaviour. Insights from psychological research enable to better assess how investors make decisions. In particular, emotions play a pivotal role in driving human decisions. Also, investors are not always rational and may suffer from various behavioural biases and cognitive limitations.

In the realm of the EU market abuse regime, concern has been raised about the question as to what extent sustainability-related information triggers disclosure obligations and insider prohibitions. The concept of inside information refers to the materiality of non-public information, which is assessed from the perspective of the reasonable investor. The fact that investors need the information to make an informed decision is supported by classical corporate finance theory. The fiction of the reasonable investor seeks to create an objective standard.

However, considering the diversity of investors in terms of sustainability preferences, the issue arises as to what is understood by the reasonable investor. Given the growing demand from investors for sustainability-related information, the question arises as to whether the notion of the reasonable investor should encompass – to some extent – the green investor. This reflects problems inherent in the notion of the reasonable investors in the light of heterogeneous investors. In the realm of sustainability, the behaviour of stakeholders is relevant information taken into account by investors, thereby having the potential to move market prices. Depending on sustainability preferences, rising prices could be a serious problem and hamper efficiency.

This results in the importance of experimental evidence. Empirical analysis is needed to show how information moves market prices. The behavioural turn in the scholarship has gained ground with a view to explaining discrepancies between theory and reality. This article highlights the fact that behavioural corporate finance has challenged classical corporate finance theory for decades. Yet the legal scholarship has hitherto underexplored the implications of behavioural sciences on the foundations of the law and regulation of capital markets information. Pursuant to the market-based approach to securities regulation, the EU has laid great emphasis on the promotion of market efficiency through disclosure obligations.² This assumes that publicly available information is incorporated into market prices. Most interesting, the EU sustainable finance regulation relies extensively on the market efficiency approach to disclosure requirements. Yet sustainable-related disclosure is an area particularly prone to trigger behavioural responses. This article seeks to compensate for the gap in the legal literature by addressing the issue of sustainable disclosure regulation through the eyes of behavioural economics.

B. Revisiting the theoretical foundations of the corporation in the light of sustainability information

I. From classical corporate governance to sustainable corporate governance

Agency theory is a major part of the economics literature according to which corporate managers are the agents of shareholders.³ Agency theory depicts the homo economicus as self-interested and utility maximiser. Corporate governance has been centred about aligning the interests of managers with the interests of shareholders, thereby mitigating conflicts of interest. Jensen argues that managers should pursue the single-valued objective of maximising the total market value of the firm.⁴

The agency problem justifies mandatory disclosure obligations to reduce information asymmetries and ensure that managers do not depart from shareholders’ interests. According to Friedman, the main responsibility of a firm is to maximise their revenue and increase returns to shareholders.⁵ As the lack of transparency is seen as an obstacle to the effectiveness of corporate governance, mandatory disclosure is used as a key tool of good governance. The underpinnings of disclosure obligations depend on the perspective of the information beneficiaries. In the case of classical corporate governance, as the purpose of the firm is shareholder value, the individual shareholders are considered as the recipients of the corporate reporting.

Environmental, Social and Governance (ESG) reporting has become a cornerstone of sustainable corporate governance.⁶ In the EU, reforming disclosure obligations has become a key pillar of sustainable finance regulation.⁷ In the case of sustainable corporate governance, the purpose of the firm is focused on broader stakeholders, i.e. a wider range of recipients of corporate sustainability reporting. This is grounded on the stakeholder theory of the corporation.⁸ The stakeholder approach crystallised as a framework for strategic management in the 1980s.⁹ Accordingly, managers need to understand the concerns of stakeholders. The ongoing shift from the shareholder primacy model to the stakeholder primacy model implies that information beneficiaries are not only shareholders but also broader stakeholders. This approach requires to expand disclosure obligations to encompass ESG aspects.

In addition, the importance of risk governance is emphasised under a multistakeholder approach to corporate law.¹⁰ For instance, Coffee discusses the move from the shareholder primacy model to the portfolio primacy model.¹¹ This approach highlights another key aspect of sustainable corporate governance. There is indeed an interest in taking into account systemic risk. In the case of sustainability, there are externalities. Sustainability is a public good, which means that everyone benefits from it but it is difficult to make sure that individual corporations contribute to it. Interestingly, the move from an individualistic to more of a collective approach has been highlighted by the portfolio primacy model, which reflects the notion of systemic risk, thereby evolving from a micro to a macro approach to disclosure obligations.

The legal framework around corporate governance has been shaped by classical financial theories that oversimplify the complexities of business relationships and decisions.¹² Consequently, behavioural corporate governance has emerged with a view to better accounting for the reality.¹³ Behavioural ethics suggests a view of corporate law that is radically different than the one portrayed by traditional legal and economic theorists.¹⁴ In particular, behavioural economics aims to make economics more realistic by providing a psychologically more accurate account of economic decision-making.¹⁵ Furthermore, behavioural economics and social sciences have criticised the fact that the shareholder centric approach has externalised the harm done to stakeholders other than the company and the shareholders.¹⁶ The current debate on corporate purpose may reverse this historical development by promoting the indirect pursuit of general interests.¹⁷ Surprisingly, the literature on behavioural ethics shows that corporate misconduct is not exclusively committed by self-interest-maximisers who enrich themselves at the expense of others but may also be perpetrated by well-meaning individuals.¹⁸ Therefore, research in this area would greatly benefit from incorporating insights of behavioural ethics into the field of corporate governance.¹⁹

Behavioural corporate governance ought to inform sustainability disclosure regulation. Disclosure can be used as a tool to trigger particular reactions in investors and companies. In the realm of sustainability, mandatory disclosure has been used for corporate social responsibility purposes as a soft-form substitute of more substantive regulations, i.e. with the ultimate goal of inducing desired corporate behaviour.²⁰ This falls within the idea of applying nudging to steer up corporate behaviour towards sustainability outcomes.²¹ This theory was used as a support of EU sustainable finance regulation. However, the outcome of this approach seems to be rather limited. It is argued that disclosure is necessary as a tool but not sufficient. In this vein, the new Sustainable Finance Strategy released by the European Commission on 6 July 2021 seems to foreshadow a shift from nudging towards positive performance obligations to invest sustainably.²²

II. From classical corporate finance to behavioural corporate finance

The mandatory disclosure regime is based on the theoretical framework stemming from classical corporate finance. The efficient capital market hypothesis (ECMH) assumes that market prices incorporate all publicly available information. According to Fama, in efficient markets, prices always fully reflect available information.²³ Summers argues that prices are fundamentally efficient if they rationally reflect fundamentals.²⁴ According to Baker and Nofsinger, the classical finance theories assume that finance participants, institutions, and even markets are rational.²⁵ Efficient price formation is thus based on making financial information publicly available to investors, thereby making the case for the mandatory disclosure paradigm. In addition, information asymmetry causes inefficiency.²⁶ Research in information economics has traditionally studied how signals can solve problems arising out of information asymmetry.²⁷ Nevertheless, the signaling value is only positive if the signal is verifiable and costly. Therefore, early research on information economics focused on overcoming information asymmetries through disclosure.²⁸

Traditionally, finance theories have assumed that investors essentially focus on the economic fundamentals, in particular corporate reporting allowing to assess the firm’s value. However, an increasing array of information that is not per se financial has proven to be able to significantly move market prices. Investors do not only rely on financial reporting when making investment decisions, but they focus on a broader array of information, including corporate sustainability reporting as well as for instance sustainability-related market-based information. The fact that investors have varied sustainability preferences further complicates matters.

Most important, behaviourists have contended that markets are not efficient.²⁹ Behavioural corporate finance has studied the potential of information to change human behaviour. For instance, Shiller has analysed the fact that human interactions, the essential cause of speculative bubbles, reflect fundamental parameters of human behaviour.³⁰ Taffler and Tuckett have shed light on emotional finance as an emerging area of behavioural finance, explaining that studies have shown how financial decisions are driven by people’s emotions.³¹ At any rate, not only does the value of the information matter, but also the signalling effect of information, i.e. how the market reacts to information. Modern research in information economics has shown that in markets with imperfect information, market actions or choices convey information, which in turn affects behaviour.³²

In the realm of sustainability, the mispricing of risk may generate market bubbles.³³ Further, it is worthwhile noting that shareholders also take into account information that matters to a wider range of stakeholders given the fact that the way that other stakeholders perceive the information may also affect the corporation. Not only does information on corporate fundamentals matter, but the perception of the corporation in the public opinion is also crucial. In short, investors should – and must – care about what others care about. Unconnected or loosely connected stakeholders reveal their beliefs about a firm through public statements and actions, thereby influencing each other’s reactions to critical events, which in turn impacts shareholders’ assessments of the firm’s value.³⁴

Behavioural finance consists of studying deviations from perfectly rational behaviour.³⁵ The descriptive approach to decision theory models the actual decisions made by individuals.³⁶ A prominent example is Kahneman and Tversky’s prospect theory according to which psychological wisdom is captured as humans have a tendency to react to changes in their environment.³⁷ In a nutshell, prospect theory claims that (i) people are risk-adverse in the gains domain, and risk-seeking in the loss domain, and that (ii) losses loom larger than equivalent gains. If sustainability disclosure triggers the perception of a monetary loss, investors may become more risk-seeking, which could eventually backfire on capital markets. According to Altman, prospect theory is a theory of average behaviour and is based on how an individual or group of individuals behave on average in a world of uncertainty.³⁸ While normative theories characterise rational choices, prescriptive theories attempt to characterise actual choices.³⁹ As evidence shows that investors often behave on a very different way than predicted by the rational choice model, behavioural corporate finance has restored a central role to emotion in decision-making.⁴⁰

In addition, the theory of the efficient markets does not fully explain price movements where stock prices are affected by a crisis of confidence, which causes a herd behaviour.⁴¹ The ‘trust behaviour’ is the foundation for thriving securities markets.⁴² Nevertheless, the empirical evidence and experimental studies prove that overconfidence explains phenomena such as excessive trading of investors, stock market anomalies, or overinvestment of firms.⁴³ Confidence issues can well be illustrated in a banking crisis. We argue that this may also occur in a sustainability crisis in the event where greenwashing scandals may affect the trust of capital markets participants in sustainability disclosure. Cascades or herding effects in collective action occur when people’s decisions to adopt a behaviour are interdependent over time.⁴⁴ The markets aggregate information. Collective action may serve as a signalling phenomenon.⁴⁵

In a nutshell, this key issue is not fully resolved scientifically. This is well illustrated by the debate between Eugene Fama, who supports the market efficiency theory, and Robert Shiller, who is a proponent of behavioural finance.⁴⁶ Interestingly, both were awarded the 2013 Nobel Prize in economics for their work on this subject. The question arises as to how to reconcile the diverging approaches. Thaler predicted the evolution of the homo economicus into the homo sapiens.⁴⁷ Nevertheless, even though experimental evidence for systemic deviation from rational behaviour has accumulated, the homo economicus as a rationally behaving subject is still a central concept in finance.⁴⁸ Part of the answer may consist of looking at these approaches as complementary. In this vein, Hens and Rieger have consistently integrated behavioural aspects into mainstream economic analysis.⁴⁹

C. Implications of finance theories on capital markets law in the light of sustainability information

I. Normative perspective on corporate sustainability disclosure

Finance theories are the underpinnings of the legal and regulatory frameworks. The mandatory disclosure paradigm seeks investor protection and market efficiency. In particular, mandatory disclosure requirements provide investors with information helping them to make informed investment and voting decisions, thereby promoting both efficient price formation and good corporate governance. Accordingly, sustainable finance regulation has used reporting as a regulatory tool. In the EU, the Corporate Sustainability Reporting Directive (CSRD) adopted in 2022 aims to harmonise ESG reporting.⁵⁰ With respect to financial institutions, the Taxonomy Regulation, and the Sustainability Finance Disclosure Regulation (SFDR) form the cornerstones of the EU sustainable finance disclosure package.⁵¹

Beyond that, the issue arises as to whether current ad hoc disclosure regime and insider dealing prohibitions apply to sustainability information. It is argued that the existing disclosure requirements and insider dealing restrictions should already be interpreted as applying to ESG information whenever financial and sustainable materiality converge. Indeed, the materiality test is at the core of the law and regulation of capital markets under the Market Abuse Regulation (MAR).⁵² In the EU, inside information consists of non-public information of a precise nature which, if it were made public, would be likely to have a significant effect on market prices.⁵³ The materiality test is carried out from the perspective of investors’ informational needs. This encompasses information a reasonable investor would be likely to use as part of the basis of his or her investment decisions.⁵⁴ The appraisal is conducted on the basis of the ex ante available information, thereby considering the anticipated impact of the information in light of the totality of the related issuer’s activity, the reliability of the source of information and any other market variables likely to affect market prices.⁵⁵ Accordingly, these factors would determine the materiality of any information (including ESG-relevant information) that might have a potential effect on market prices.

The notion of the reasonable investor is an indeterminate legal concept. Concern has been raised about operating the reasonable investor test under the EU Market Abuse Regulation. The question arises as to whether the reasonable investor is to be considered individually as an average investor or collectively as a reflection of the market as a whole.⁵⁶ At any rate, policymakers and courts have sought to create an objective standard. This falls in line with the market efficiency theory. The common perception of the reasonable investor reflects the rational choice model of economic decision-making. Accordingly, the reasonable investor behaves rationally based on fundamental information.⁵⁷ In this regard, the law and regulation of capital markets information has extensively relied on classical corporate finance.

Even under the classical approach, sustainability information may already be relevant. Investors’ growing demand for sustainability-relevant information has led to increasing the likelihood that ESG information impacts market prices. If ESG information is taken into account in the decision-making process, it becomes financially relevant with respect to the price formation process. In fact, an increasing array of information that is not per se financial has proven to be likely to significantly move market prices. Accordingly, the existing ad hoc disclosure and insider dealing regime have already applied to a broader range of information relating to the firm. This fact has revealed the importance of making an assessment on a case-by-case basis. It is argued that this assessment is increasingly relevant in the realm of sustainability-relevant information. For instance, the German financial market authority – Bundesanstalt für Finanzdienstleistungaufsicht (BaFin) – explicitly refers to substantial environmental disasters as potential triggers of ad hoc disclosure obligations.⁵⁸ This evolution reflects the dynamic nature of the materiality test. The mandatory disclosure paradigm relies on open-ended standards, which are expansive by their very nature, such as the materiality requirement, which is characterised by an inherent vagueness, thereby inducing firms to disclose more information.⁵⁹

II. Towards an empirical perspective on sustainable capital markets law

Behavioural insights ought to guide policymakers and regulators in defining appropriate goals and means of regulation.⁶⁰ If the rational choice model provides a powerful basis for predicting investors’ behaviour, psychologists and experimental economists have cast doubt over the theory by showing that human behaviour often violates this paradigm, thereby leading the way towards a new legal realism.⁶¹ While EU sustainable finance regulation has laid great emphasis on reporting as a regulatory tool, it is crucial to discuss the implications of behavioural findings on the mandatory disclosure paradigm. Sustainability disclosure requirements are considered behaviour-steering measures aiming at fostering transparency and reducing information asymmetries.⁶² Accordingly, disclosure requirements on ESG metrics may incentivise companies to improve their ESG profile.⁶³ However, in the event of insufficient supervision and enforcement, companies may end up being concerned only with reputational effects, thereby creating a real danger of greenwashing, i.e. companies may not actually change their behaviour but may only give the misleading impression that they do so.⁶⁴

In fact, a substantial part of the scholarship has expressed criticism against the mandatory disclosure paradigm.⁶⁵ In particular, the rule-based approach of mandated disclosure is challenged by the behavioural sciences literature. Nevertheless, the question of what are the appropriate legal responses to the behavioural findings is tricky. If scholars generally agree that the disclosure regime is flawed, the responses they give are inconsistent. On the one hand, a strand of the literature discusses the failure of the mandatory disclosure paradigm and conclude that this is a fact of overregulation. On the other hand, another strand of the literature contends that the mandatory disclosure regime is a fact of deregulation, and that disclosure is insufficient as a regulatory tool, concluding that there should be more substantive regulation.

Bainbridge concluded that behavioural economics offers support for deregulation.⁶⁶ Davidoff and Hill argue that the limits of disclosure as a regulatory tool reveal the need for a better understanding of the relationship between information processing and decision-making.⁶⁷ In so doing, they advocate for a behavioural turn in the legal scholarship. Avgouleas discusses the impact of socio-psychological factors on investor decision-making, including cognitive biases, bounded rationality, and herding, and concludes that policy makers should consider disclosure‘s limitations and devise alternative strategies.⁶⁸ According to him, the reliance on disclosure as a regulatory tool is the result of deregulation given the fact that the rational investor model is grounded on the belief that markets can self-regulate, which stems from the pre-eminence of rational choice theory in modern financial regulation.⁶⁹ In the same vein, Zamir and Teichman argue that the behavioural approach demonstrates the limited ability of disclosure to guide investors’ decisions.⁷⁰ According to Gerner-Beuerle, the traditional disclosure paradigm of securities regulation is challenged in the algorithmic era where market inefficiencies may not always result from informational asymmetries but rather from market design.⁷¹ Regulation needs to appreciate how algorithms affect market dynamics and by extension the efficient market paradigm.⁷²

In the light of behavioural corporate finance research findings, key notions should be revisited to better integrate empirics into the legal analysis. In particular, securities fraud litigation would benefit from further empirical work given the relevance of the behavioural approach.⁷³ Yet lawmakers, legal academics, and courts have been reluctant to seriously engage in empirical analysis. According to Huang, the notions of materiality and of the reasonable investor should account for empirical data, experimental evidence and moody investing.⁷⁴ The reasonable investor test may no longer be perceived as an objective standard. Bainbridge concluded that legal scholars can no longer assume rationality on the part of investors.⁷⁵ Tor highlighted the fact that behavioural evidence reveals the limited ability of rationality-inducing market mechanisms to eliminate bounded rational behaviour.⁷⁶ The question arises as to what are the legal responses to the behavioural findings in the light of investors’ bounded rationality. Lin proposed a new typology of reasonable investor, the algorithmic investor, which has ramifications on the core concepts of disclosure and materiality.⁷⁷

The importance of empirical analysis is highlighted in the frameworks for ad hoc disclosure obligations and insider dealing prohibitions. In the EU market abuse regime, the MAR does not make a clear distinction between the notion of inside information with respect to insider trading and with respect to disclosure obligations.⁷⁸ Although the theoretical framework may appear consistent, a more factual approach is necessary with a view to refining the analysis, which is particularly relevant in protracted decision-making processes.⁷⁹ Broadly speaking, the question of the materiality of sustainability information requires a case-by-case analysis.⁸⁰ Further, experimental evidence should increasingly be used by courts with respect to the application of the notion of materiality and the notion of the reasonable investor. For instance, in the IKB case, the the German Federal Court of Justice (BGH) held that a reasonable investor would take into account irrational reactions of other market participants, including herd behaviour.⁸¹ This kind of analysis may well apply to sustainability-related information. Yet a problem arises where courts refuse to take into account empirical data by holding that the concepts of materiality and the reasonable investors are questions of law and not questions of fact. We argue that the narrow interpretation ought to be expanded. In particular, the door for an empirical analysis is open with issuers’ duty to assess the materiality of information ex ante. Issuers thus have to be aware of what kind of information may move market prices, i.e. they have to carry out a factual analysis and may not rely on a theoretical standard. Increasingly sophisticated tools enable them to analyse the data and make assessments on a case-by-case basis. Consequently, courts should also accept empirical evidence while analysing the material character of information.

D. Conclusion

The field of sustainable finance regulation is characterised by the pervasive resilience of the mandatory disclosure paradigm. However, the theoretical underpinnings of the legal approach should be reviewed from a critical standpoint. Theoretical models in finance have been revisited in the light of behavioural sciences. Behaviouralists have brought useful experimental findings to bear on legal analysis. Empirics has shed light on the discrepancy between theory and reality.

In particular, the legal concept of materiality is defined from the perspective of investors. We conclude that a case-by-case analysis is crucial. This is relevant in the light of investors’ growing demand for sustainability-related information. While mandatory disclosure is a defining characteristic of EU sustainable finance regulation, the behavioural findings have highlighted that the disclosure based-market discipline approach to sustainable finance regulation is flawed.

Finally, policymakers and regulators ought to account for behavioural findings with a view to developing behaviourally informed regulation. Disclosure obligations are part of the behavioural regulatory toolkit given that disclosure triggers reactions in investors and companies with a view to inducing desired corporate behaviour. The development of sustainability taxonomies consists of behaviourally informed tools for disclosure and transparency.⁸² Yet mandatory disclosure appears insufficient to steer up the capital markets towards sustainable investment.

Acknowledgments

The author is deeply grateful for constructive feedback from the organisers and attendees of the SCFL 2022 Conference on Sustainability in Commercial and Financial Law at the University of Zurich and of the EBI International Summer School Banking & Capital Markets Law 2023 at the Università Cattolica del Sacro Cuore in Italy. The author thanks Kern Alexander, Yoan Hermstrüwer, Andrea Perrone and Yannick Caballero Cuevas for their precious comments on an earlier draft of this paper as well as Banu Gün for research assistance.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Louis D Brandeis, ‘What Publicity Can Do’(Harper's Weekly, 20 December 1913) 10.

2 Jennifer Payne, ‘Disclosure of Inside Information’ (2019) ECGI Law Working Paper 422/2019, 3 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3244401> accessed 15 May 2023.

3 Michael C Jensen, ‘Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers’ (1986) 76(2) The American Economic Review 323.

4 Michael C Jensen, ‘Value Maximisation, Stakeholder Theory, and the Corporate Objective Function’ (2001) 7(3) European Financial Management 297.

5 Milton Friedman, ‘A Friedman Doctrine – The Social Responsibility of Business is to Increase Its Profits’ (New York Times, 13 September 1970) 17.

6 Geneviève Helleringer and Christina P Skinner, ‘The Hardening of Corporate ESG’ in Kern Alexander, Matteo Gargantini and Michelle Siri (eds), Handbook of EU Sustainable Finance, Regulation, Supervision and Governance (Cambridge University Press, forthcoming 2024); Kern Alexander and Aline Darbellay, ‘Disclosure Regulation and Sustainability’ in Kern Alexander, Matteo Gargantini and Michelle Siri (eds), Handbook of EU Sustainable Finance, Regulation, Supervision and Governance (Cambridge University Press, forthcoming 2024).

7 Pierre-Henri Conac, ‘Sustainable Corporate Governance in the EU: Reasonable Global Ambitions?’ (2022) 4 Revue Européenne du Droit 111.

8 Thomas Donaldson and Lee E Preston, ‘The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications’ (1995) 20 The Academy of Management Review 65.

9 R Edward Freeman and John McVea, ‘A Stakeholder Approach to Strategic Management’ in Michael A Hitt, R Edward Freeman and Jeffrey S Harrison (eds), The Blackwell Handbook of Strategic Management (Blackwell Publishing 2005) 183.

10 Andrea Perrone, ‘Banking Regulation and Multistakeholder Approach to Corporate Law’ (forthcoming 2024) 8.

11 John C Coffee, Jr, ‘The Future of Disclosure: ESG, Common Ownership, and Systematic Risk’ [2021] Columbia Business Law Review 602.

12 Thomas Clarke, ‘The Impact of Financialisation on International Corporate Governance: the Role of Agency Theory and Maximising Shareholder Value’ (2014) 8(1) Law and Financial Markets Review 39.

13 Donald C Langevoort, ‘Behavioral Approaches to Corporate Law’ in Claire A Hill and Brett H McDonnell (eds), Research Handbook on the Economics of Corporate Law (Edward Elgar 2012) 24.

14 Yuval Feldman, Adi Libson and Gideon Parchomovsky, ‘Corporate Law for Good People’ (2021) 115 Northwestern University Law Review 1125, 1125.

15 Sabine Frerichs, ‘Putting Behavioural Economics in its Place: the New Realism of Law, Economics and Psychology and its Alternatives’ (2021) 72(4) Nothern Ireland Legal Quarterly 651.

16 Eli Bukspan, ‘Corporate Purpose and Stakeholder Fairness Through the Lens of Behavioral Economics: Legal Implications’ (2021) available at <https://ssrn.com/abstract=3972970> accessed 22 August 2023, 76 et seq.; Klaus J Hopt, ‘Corporate Purpose and Stakeholder Value – Historical, Economic and Comparative Law Remarks on the Current Debate, Legislative Options and Enforcement Problems’ (2023) ECGI Law Working Paper N°690/2023, 14.

17 ibid 40.

18 Feldman, Libson and Parchomovsky (n 14) 1130.

19 ibid.

20 Luca Enriques and Sergio Gilotta, ‘Disclosure and Financial Market Regulation’ in Niamh Moloney, Eilís Ferran and Jennifer Payne (eds), The Oxford Handbook on Financial Regulation (Oxford University Press 2015) 511.

21 Cass R Sunstein, ‘Nudges.gov: Behaviorally Informed Regulation’ in Eyal Zamir and Doron Teichman (eds), The Oxford Handbook of Behavioral Economics and the Law (Oxford University Press 2014) 719.

22 European Commission, Strategy for Financing the Transition to a Sustainable Economy, COM(2021) 390 final, 6 July 2021; Dirk A Zetzsche and Linn Anker-Sorensen, ‘Regulating Sustainable Finance in the Dark’ (2022) 23 EBOR 47, 59.

23 Eugene F Fama, ‘Efficient Capital Markets: A Review of Theory and Empirical Work’ (1970) 25(2) The Journal of Finance 383.

24 Lawrence H Summers, ‘Does the Stock Market Rationally Reflect Fundamental Values?’ (1986) 41(3) The Journal of Finance 591.

25 H Kent Baker and John R Nofsinger, ‘Behavioral Finance: An Overview’ in H Kent Baker and John R Nofsinger (eds), Behavioral Finance Investors, Corporations and Markets (John Wiley & Sons, Inc. 2010) 3.

26 George A Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’ (1970) 84(3) The Quarterly Journal of Economics 488.

27 Amna Kirmani and Akshay R Rao, ‘No Pain, No Gain: A Critical Review of the Literature on Signaling Unobservable Product Quality’ (2000) 64(2) Journal of Marketing 66.

28 Joseph E Stiglitz, ‘Information and the Change in the Paradigm in Economics’ (2002) 92(3) The American Economic Review 460.

29 Eyal Zamir and Doron Teichman, Behavioral Law and Economics (Oxford University Press 2018) 357.

30 Robert J Shiller, ‘From Efficient Markets Theory to Behavioral Finance’ (2003) 17(1) The Journal of Economic Perspectives 83.

31 Richard J Taffler and David Tuckett, ‘Emotional Finance: The Role of the Unconscious in Financial Decisions’ in Baker and J Nofsinger (n 25) 95.

32 Stiglitz (n 28) 460-72.

33 Andrea Perrone and Andrea Cardani, ‘Investment Services and the Risks of Sustainable Finance’ in Handbook on MiFID II (forthcoming 2024).

34 Sinziana Dorobantu, Witold J Henisz and Lite Nartey, ‘Not All Sparks Light a Fire: Stakeholder and Shareholder Reactions to Critical Events in Contested Markets’ (2017) 62(3) Administrative Science Quarterly 561.

35 Thorsten Hens and Marc Oliver Rieger, ‘Introduction’ in Thorsten Hens and Marc Oliver Rieger (eds) Financial Economics, A Concise Introduction to Classical and Behavioral Finance (2nd edn, Springer 2016) 11.

36 ibid 54.

37 Daniel Kahneman and Amos Tversky, ‘Prospect Theory: An Analysis of Decision Under Risk’ (1979) 47(2) Econometrica 263.

38 Morris Altman, ‘Prospect Theory and Behavioral Finance’ in Baker and Nofsinger (n 25) 191.

39 Richard H Thaler, ‘From Homo Economicus to Homo Sapiens’ (2000) 14(1) The Journal of Economic Perspectives 133.

40 Demetra Arsalidou, ‘Institutional Investors, Behavioural Economics and the Concept of Stewardship (2015) 6(6) Law and Financial Markets Review 410.

41 David S Scharfstein and Jeremy C Stein, ‘Herd Behavior and Investment’ (1990) 80(3) The American Economic Review 465; Kenneth A Froot, David S Scharfstein and Jeremy C Stein, ‘Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation’ (1992) 47(4) The Journal of Finance 1461; Abhijit V Banerjee, ‘A Simple Model of Herd Behavior’ (1992) 107(3) The Quarterly Journal of Economics 797; Russ Wermers, ‘Mutual Fund Herding and the Impact on Stock Prices’ (1994) 54(2) The Journal of Finance 581.

42 Lynn A Stout, ‘Trust Behavior: The Essential Foundation of Securities Market’ in Baker and Nofsinger (n 25) 513, 517.

43 Markus Glaser and Martin Weber, ‘Overconfidence’ in Kent Baker and Nofsinger (n 25) 241-2.

44 Susanne Lohmann, ‘Collective Action Cascades: An Informational Rationale for the Power in Numbers’ (1992) 14(5) Journal of Economic Surveys 655-7.

45 ibid 676.

46 Fama (n 23) 383; Shiller (n 30) 83-104.

47 Thaler (n 39) 140.

48 Hens and Rieger (n 35) 11.

49 ibid.

50 Directive 2022/2464/EU of the European Parliament and of the Council of 14 December 2022 as regards corporate sustainability reporting [2022] OJ L 322/1 (hereinafter referred to as 'CSRD 2022').

51 Regulation 2020/852/EU of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment [2020] OJ L 198/13 (hereinafter referred to as 'Taxonomy Regulation'); Regulation 2019/2088/EU of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector [2019] OJ L 317/1 (hereinafter referred to as 'SFDR').

52 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse [2014] OJ L 173/1 (hereinafter referred to as 'Market Abuse Regulation').

53 Market Abuse Regulation, art 7(1)(a)).

54 Market Abuse Regulation, art 7(4).

55 Market Abuse Regulation, Recital 14.

56 Peter O Mülbert and Alexander Sajnovits, ‘The Inside Information Regime of the MAR and the Rise of the ESG Era’ (2021) European Corporate Governance Institute – Law Working Paper No. 548/2020, 256-290, European Company and Financial Law Review <https://ssrn.com/abstract=3719944> accessed 5 May 2023.

57 Marco Ventoruzzo, Chiara Picciau and others, ‘Inside Information, Insider Dealing, Unlawful Disclosure of Inside Information, and Market Manipulation’ in Marco Venoruzzo and Sebastian Mock (eds), Market Abuse Regulation (2nd edn, Oxford University Press 2022); Rüdiger Veil, ‘Insider Dealing’ in Rüdiger Veil (ed), European Capital Markets Law, (3rd edn, Hart Publishing 2022) 189-208.

58 BaFin, ‘Modul C: Regelungen aufgrund der Marktmissbrauchsverordnung (MAR)’ (25 March 2020).

59 Enriques and Gilotta (n 20) 511-36, 534.

60 Zamir and Teichman (n 29) 355.

61 Daniel A Farber, ‘Toward a New Legal Realism’ (2001) 68(1) University of Chicago Law Review 279; Thomas J Miles and Cass R Sunstein, ‘The New Legal Realism’ (2008) 75(2) The University of Chicago Law Review 831; Victoria Nourse and Gregory Shaffer, ‘Varieties of New Legal Realism: Can a New World Order Prompt a New Legal Theory?’ (2009) 95(1) Cornell Law Review 61.

62 Veerle Colaert, ‘The Changing Nature of Financial Regulation, Sustainable Finance as a New Policy Goal’ (2022) KU Leuven Jan Ronse Institute for Company and Financial Law Working Paper N°2022/04, 12.

63 ibid 14.

64 ibid 15.

65 Troy A Paredes, ‘Blinded by the Light: Information Overload and Its Consequences for Securities Regulation’ (2003) 81(2) Washington University Law Quarterly 417; Steven L Schwarcz, ‘Rethinking the Disclosure Paradigm in a World of Complexity’ [2004] University of Illinois Law Review 1; Tamar Frankel, ‘The Failure of Investor Protection by Disclosure’ (2013) 81(2) University of Cincinnati Law Review 421; Henry T C Hu, ‘Too Complex to Depict? Innovation, “Pure Information,” and the SEC Disclosure Paradigm’(2012) 90(7) Texas Law Review 1601 (arguing that modern financial innovation has rendered disclosure that is “far more complex” than before, requiring other means of regulation); Steven L Schwarcz, ‘Disclosure’s Failure in the Subprime Mortgage Crisis’ [2008] Utah Law Review 1109 (arguing that most of the risks that led to the subprime mortgage crisis were actually disclosed); Steven M Davidoff and Claire A Hill, ‘Limits of Disclosure’ (2012) 36 Seattle University Law Review 599 (stating that improvements in disclosure do not do much to prevent or mitigate the effects of future crises); Rolf H Weber, ‘From Disclosure to Transparency in Consumer Law’ in Klaus Mathis and Avishalom Tor (eds), Consumer Law and Economics (Volume 9, Springer 2021) 73 (criticising the detail-oriented concept of mandated disclosure and favoring a shift to the more appropriate concept of transparency); Rolf H Weber and Rainer Baisch, ‘Climate Change Reporting and Human Information Processing – Quo Vadis Transparency?’ (2023) Special Issue: Corporate Law and Climate Change, ex/ante 19.

66 Stephen M Bainbridge, ‘Mandatory Disclosure: A Behavioral Analysis’ (2000) 68 University of Cincinnati Law Review 1023.

67 Davidoff and Hill (n 65) 604.

68 Emilios Avgouleas, ‘The Global Financial Crisis and the Disclosure Paradigm in European Financial Regulation: The Case for Reform’ (2009) 6(4) European Company and Financial Law Review 440.

69 ibid 448.

70 Zamir and Teichman (n 29) 375.

71 Carsten Gerner-Beuerle, ‘Algorithmic Trading and the Limits of Securities Regulation’ in Emilios Avgouleas and Heikki Marjosola (eds), Digital Finance in Europe: Law, Regulation, and Governance (de Gruyter 2022) 109.

72 ibid 112.

73 Cass R Sunstein, Christine Jolls and Richard H Thaler, ‘A Behavioral Approach to Law and Economics’ (1998) 50 Stanford Law Review 1471, 1532.

74 Peter H Huang, ‘Moody Investing and the Supreme Court: Rethinking the Materiality of Information and the Reasonableness of Investors’ (2005) Penn Law: Legal Scholarship Repository 99.

75 Bainbridge (n 66) 1026.

76 Avishalom Tor, ‘The Methodology of the Behavioral Analysis of Law’ (2008) 4 Haifa Law Review 237, 312.

77 Tom C W Lin, ‘Reasonable Investor(s)’ (2015) 95 Boston University Law Review 461.

78 Carmine Di Noia, Mateja Milič and Paola Spatola, ‘Issuers Obligations under the New Market Abuse Regulation and the Proposed ESMA Guideline Regime: a Brief Overview’ (2014) 26(2) Zeitschrift für Bankrecht und Bankwirtschaft 96.

79 Markus Geltl v Daimler AG (Case C-19/11) [2012] ECJ 2012; Hartmut Krause and Michael Brellochs, ‘Insider Trading and the Disclosure of Inside Information after Geltl v Daimler-A Comparative Analysis of the ECJ Decision in the Geltl v Daimler Case with a View to the Future European Market Abuse Regulation’ (2013) 8(3) Capital Markets Law Journal 283.

80 Aline Darbellay and Yannick Caballero Cuevas, ‘The Materiality of Sustainability Information under Capital Markets Law’ (2023) 1 Swiss Review of Business and Financial Market Law 44.

81 BGH of 13 December 2011 – XI ZR 51/10 (IKB), BGHZ 192, 90, 107-8 [44].

82 Sunstein (n 21) 719-47.